COMMISSION STAFF WORKING DOCUMENT Country Report Finland 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.
Date: 2015-02-26
Institutions: European Commission
Subjects: Finland, competitiveness, economic disparity, economic growth, economic recovery, economic reform, employment aid, employment statistics, higher education, investment, loss, macroeconomics, processing industry, small and medium-sized enterprises, structural adjustment, tax collection, youth employment













EUR-Lex - 52015SC0045 - EN











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52015SC0045

COMMISSION STAFF WORKING DOCUMENT Country Report Finland 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  {COM(2015) 85 final}     This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /* SWD/2015/0045 final */









 
Executive summary  1
1.       Scenesetter:
economic situation and outlook  3
2.       Imbalances,
risks and adjustments 11
2.1.   External
sustainability  12
2.2.   Competitiveness
challenges 18
2.3.   Indebtedness,
deleveraging pressures and housing market developments 36
3.       Other
structural issues 46
3.1.   Taxation,
debt sustainability and fiscal framework  47
3.2.   Labour market
and education  50
3.3.   Products and
services market 57
3.4.   Efficiency
enhancing reforms in the public sector 59
AA. 62
AB.   Statistical
annex  68
LIST OF Tables
1.1.     Key
financial, economic and social indicators 8
1.2.     MIP
scoreboard indicators 9
2.3.1.  Financial
flows involving banking sector, 1-10/2014 - Finland   32
2.3.2.  MFI Soundness
Indicators - Finland   32
2.3.3.  Non-financial
corporations debt to profits and debt to capital -distribution  39
AB.1.  Macroeconomic
indicators 63
AB.2.  Financial
market indicators 64
AB.3.  Taxation
indicators 65
AB.4.  Labour market
and social indicators 66
LIST OF Graphs
1.1.     Real GDP
growth by demand component 3
1.2.     Components
of potential growth  4
1.3.     Current
account, export market share (EMS) 4
1.4.     Net
international investment position and external debt 4
1.5.     Real
effective exchange rates 5
1.6.     Breakdown
of debt by sector (non-consolidated) 6
1.7.     Public
finance indicators 6
1.8.     Employment,
unemployment and activity rate  7
2.1.1.  Breakdown of
the Finnish external position (current and capital accounts) 11
2.1.2.  Trade balance,
EU-28  11
2.1.3.  Recent current
account and trade developments, Finland, 12-month moving sum, quarterly data   12
2.1.4.  Net
lending/borrowing by sector, Finland   12
2.1.5.  Saving and
investment of sectors, Finland (% of GDP) 12
2.1.6.  Breakdown of
net international investment position, Finland   13
2.1.7.  Domestic value
added content of exports, EU-28, 2009  14
2.1.8.  Share of
top-10 export goods in total export (%) 14
2.1.9.  Concentration
of export good structure, 2013  14
2.1.10.          Share
of top-10 enterprises in total export, 2011, (%) 15
2.2.1.  Structure of
gross value added by industrial aggregates, 1975-2013, Finland   16
2.2.2.  Gross value
added in basic prices, current prices, 1990-2013  16
2.2.3.  Real gross
value added in basic prices in manufacturing 1990-2013  16
2.2.4.  Productivity
growth in manufacturing industries (%, y-o-y) and growth contributions by
sub-industries (percentage points), Finland   17
2.2.5.  Change of GDP
deflator (%, y-o-y) and contributions to growth, (pps.) - — Finland   18
2.2.6.  Change in
competitiveness (%, y-o-y) and contributions from nominal effective exchange
rate and total economy nominal unit labour costs, percentage points (pps.), —
Finland   19
2.2.7.  Ratio of
export price deflated REER to manufacturing unit labour cost deflated REER,
1999-2014  19
2.2.8.  Ratio of
export price deflated REER to total economy unit labour cost deflated REER,
1999-2014  20
2.2.9.  Export market
share development (%) 20
2.2.10.          Export
market share, Finland, annual change (%) 20
2.2.11.          Export
market share, Finland, compared with the export market share of the euro area,
(%) 21
2.2.12.          Domestic
value-added content of export, Finland (% of GDP) 21
2.2.13.          Domestic
value added of foreign demand, change between 2000 and 2009, % of GDP  21
2.2.14.          Export
developments by product category between 2000 and 2013  22
2.2.15.          Nokia's
contribution to the Finnish GDP (%) 22
2.2.16.          Components
of change of Finnish export market share between 2000 and 2013  23
2.2.17.          Consumption
of households and net exports (% of GDP) 23
2.2.18.          Export
and import component, EU-28, change between 2000 and 2011 (% of GDP) 25
2.2.19.          Export
and import component, Finland (% of GDP) 25
2.2.20.          Export
and import ratio as well as foreign value-added content of exports, Finland (%
of GDP) 25
2.2.21.          Finnish
foreign direct investment vis-à-vis the world and EU-28 (%) 26
2.2.22.          Export
of goods and services, Finland (% of GDP) 26
2.2.23.          Innovation
and specialisation on top-quality export products 27
2.2.24.          Age
composition of small businesses (%) 28
2.2.25.          Share
of employment in firms never growing above one employee (manufacturing) 28
2.2.26.          Start-up
rates 29
2.2.27.          Growth
expectation of early-stage entrepreneurs in innovation-driven economies 29
2.3.1.  Breakdown of
debt by sector (non-consolidated) — Finland   31
2.3.2.  Lending to
households (HH) and non-financial corporations (NFC) in Finland   31
2.3.3.  Household
sector loans by type of loan  33
2.3.4.  Average
mortgage rates - selected countries 33
2.3.5.  Nominal house
prices by region, 1990=100 — Finland   34
2.3.6.  Growth of
house prices and loans by monetary financial institutions for house purchases —
Finland   34
2.3.7.  Leverage,
households — Finland   34
2.3.8.  Household debt
— Finland   35
2.3.9.  Housing market
valuation — Finland   35
2.3.10.          Real
house prices — selected countries 36
2.3.11.          Falling
residential investment associated with higher housing valuations, regional data   36
2.3.12.          Incentives
to invest fail to increase residential investment 37
2.3.13.          Leverage,
non-financial corporations — Finland   37
2.3.14.          Balance
sheet, non-financial corporations - Finland   38
2.3.15.          Breakdown
of year-on-year changes in debt-to-GDP ratio, households (ESA 2010) — Finland   38
2.3.16.          Breakdown
of year-on-year changes in debt-to-GDP ratio, non-financial corporations (ESA
2010) — Finland   39
3.1.1.  General government
total revenue, total expenditure and net-lending /net-borrowing,  % of GDP , Finland   43
3.2.1.  Labour market
indicators 45
3.2.2.  Tax rate for
an individual (single, no children) to take up work at 67 % of the average wage  48
3.3.1.  Restrictions
on retail trade  52
LIST OF Boxes
1.1.     Economic surveillance process 8
2.2.1.  Foreign direct investment, trade linkages and
especially energy tie Finland close to Russia   25
LIST OF Maps
No table of contents
entries found.
Structural adjustments still weigh on
Finland’s economic performance, but a slow recovery is taking hold. After contracting for two consecutive years, Finland’s output
stabilised in 2014. An increase in net exports helped to soften the negative
impact of a further large decline in investments. Consumption was held back by
declining employment, low wage growth and tax increases. However, economic
growth gained momentum in the second half of the year and the recovery is
expected to continue in 2015 and 2016. Several factors support this
expectation. First, the shakeout in the electronic and paper sectors seems to
have run its course. Second, with the conclusion, in 2013, of a moderate wage
agreement, Finnish wage developments have moved, albeit belatedly, into line
with the new post-crisis reality, supporting the restoration of cost
competitiveness. Third, a gradual improvement in external demand, together with
the decline in imported fuel prices and the exchange rate, should support
exports. Finally, credit conditions remain supportive of an increase in
economic activity. On the other hand, weak labour market conditions and wage
moderation will continue weighing down on private consumption.
This Country Report assesses Finland’s
economy against the background of the Commission’s Annual Growth Survey which
recommends three main pillars for the EU’s economic and social policy in 2015:
investment, structural reforms and fiscal responsibility. In line with the Investment Plan for Europe, it also explores ways
to maximise the impact of public resources and unlock private investment.
Finally, it assesses Finland in the light of the findings of the 2015 Alert
Mechanism Report, in which the Commission found it useful to further examine
the persistence of imbalances or their unwinding. The
main findings of the in-depth review contained in this country report are:
·       Following a steady deterioration from 2003 until 2011, the Finnish
current account has stabilised at a small deficit.
The goods balance is expected to have turned back into surplus in 2014 and is
projected to improve further in the coming years. Finland’s net international
investment position deteriorated in 2014, but remains in positive territory. In
addition, while the economy remains exposed to asymmetric shocks, its
vulnerability to external developments has decreased. Overall, Finland’s
external sustainability is not a concern.
·       The rapid decline of some manufacturing industries (electronics and
forest) has largely ended. The impact of the
collapse of the electronics and paper industries on GDP and exports has not yet
been overcome. GDP remains below its pre-crisis level and potential growth has
declined. Yet, there are signs that the process of economic restructuring has
started, albeit very gradually. The information and communication-technologies
service industry and professional and other support services to the private
sector, have been clearly expanding for over a decade. In manufacturing, the
chemical industry especially has been growing steadily over recent years. In
addition, new investments in the hard-hit electronics and paper industries
should support the launch of new products. The rate of start-ups is low in
comparison with other peer economies. This does not favour the dispersion and
spillover of Finland’s high innovation potential.
·       The productivity of Finnish companies is in line with its Nordic
peers and recently the growth in labour productivity started to accelerate. Cost competitiveness deteriorated in 2008-12, partly due to the
decline in high-productivity industries and partly due to wage rises above
productivity growth, with other domestic costs also increasing. More recently,
both wage moderation and productivity growth have started to gradually improve
cost competitiveness relative to competitor countries.
·       While public investment is relatively high, private investment is
low. Private-sector incentives to invest into new
machinery and equipment have diminished by relatively rapid growth of wages and
other production costs. Low equipment investment can reduce Finland's
competitiveness and growth potential. However, relative cost competitiveness
has started to improve gradually and consequently investments are assumed to
gradually recover in the coming years. 
·       Private-sector debt does not appear to be a source of immediate
concern, but it needs to be closely monitored.
Private-sector debt has stabilised at a level just above the EU average.
However, there appear to be no urgent deleveraging pressures, given the sound financial
sector and low debt-servicing costs. The increase in house prices seems to have
stopped, lowering the probability that household debt will increase in the near
future.
The country report also analyses other
macroeconomic and structural issues and the main findings are:
·      
Finland’s debt-to-GDP ratio is on a rising
trend and will exceed 60% in 2015. Ageing-related
costs imply risks for the sustainability of public finances in the medium to
long term. Finland has limited room to increase tax revenues, as the tax ratio
is already high. However, the efficiency of the public sector can be improved
further, particularly in areas that face cost-pressures in the future from
ageing — mainly healthcare and long-term care.
·      
Recent labour market performance has been
weak, but still compares favourably with the EU-average. Unemployment has been increasing. Early exit from the labour
market occurs mainly through disability or through the extended unemployment
benefits available for older workers. 
·      
The Finnish retail sector remains highly
concentrated, being dominated by two local retail groups. The dominance is strengthened by planning rules and strict
regulation on large-scale outlets. The regulations have a negative impact on
productivity growth and constitute market entry and market expansion barriers
for new operators.
Overall, Finland has made some progress
in addressing the 2014 country-specific recommendations. An important development is the agreement reached between the
social partners regarding implementation of the pension reform from 2017. In
addition, reforms of the social and healthcare sectors have been initiated to
better control expenditure growth in these areas. Some steps to increase the
growth-friendliness of the tax system have been taken. Other positive action,
such as measures to improve employment of the elderly, has been taken in the
labour market. The government took new measures to diversify the economy,
notably though the promotion of innovation and investment in digitalisation,
biotechnology and clean technologies. Furthermore, public support focuses on
promoting exports of SMEs and on risk capital. Some recommendations have not
been fully addressed. For instance, while the new bill amending the land use
and building act incorporates competition as an objective, the restrictions
regarding large-scale outlets have not been addressed.
This country report reveals the policy
challenges stemming from the analysis of macro-economic imbalances, namely:
·       Earlier losses to cost competitiveness would recover further if
careful control of the development of costs continued in the future. Over recent years, cost pressures in the non-tradable sector have
had a negative impact on cost competitiveness.
·       Despite a business environment that has many strong points, Finland
is missing out on some opportunities to improve its non-cost competitiveness. Finnish enterprises, including start-ups, tend to remain small and
do not actively seek to grow or internationalise. There is room to improve the
capacity of universities in turning research into innovations.
·       Households faced a relatively quick increase in their debt burden. Household debt mainly takes the form of mortgage debt. Recent
declines in interest rates have reduced the burden of servicing the debt, but
also reduced the incentives to deleverage. Further macro-prudential measures
could help to stem a further increase in household indebtedness.
In addition, other policy challenges are ensuring the sustainability
of public finances in view of pressures from ageing-related costs and, linked
to this, using better the full potential of the labour market.
Growth drivers and outlook
Structural adjustments are weighing on
Finland’s economic performance. Apart from
suffering from the weak global economy following the financial and economic
crisis, Finland has also had to cope with an asymmetric shock in the form of
the loss of external demand for mainly electronic and paper products. This led
to substantially lower exports and a loss in output that could not easily and
quickly be replaced by other products. Wages were slow to react to the lower
output because Finland had gone into the crisis with a generous multiannual
wage settlement reflecting pre-crisis conditions. Combined with the loss in
output in the highly productive electronics sector (dominated by Nokia), this
led to an increase in unit labour costs and an erosion of cost competitiveness.
The changing economic conditions led to a decline in growth, the emergence of a
negative output gap, an increase in unemployment, an evaporation of Finland’s
current account surplus, and deteriorating public finances. Inflation steadily
declined while remaining positive.
 Graph 1.1:     Real GDP growth by demand component 
 Source: European Commission 
The Finnish economy seems to be slowly
turning the corner. Following a decline in economic
activity in 2012-13, the Finnish economy bottomed out in 2014 and is expected
to start recovering in 2015 (Graph 1.1). Several factors explain this
development. First, the shake-out in the electronic and paper sectors seems to
have run its course. Second, although belated, Finnish wage developments have
moved into line with the new post-crisis reality through the conclusion, in
2013, of a moderate wage agreement. This agreement, which is possibly to be
extended for the coming years, supports the restoration of cost and export
competitiveness through lower growth in unit labour costs. Third, a gradual
improvement in economic prospects should support Finnish exports, especially as
these are centred on intermediate and capital goods for which demand can be
expected to increase during a recovery phase. Fourth, the decline in energy
prices and the exchange rate should support exports. Finally, credit conditions
remain supportive to an increase in economic activity. On the other hand, weak
labour market conditions and wage moderation will continue weighing on private
consumption. A fuller discussion of Finland’s near-term economic outlook is
contained in the Commission’s winter 2015 economic forecast.
Medium-term challenges remain. Finland’s growth potential is affected by the decline in its
working-age population. Growth potential is estimated at slightly below
1  % in the medium term and close to 1  % in the longer
term, contingent on productivity gains (Graph 1.2).([1]) The long–term sustainability of public finances is not yet secured
and savings in expenditure will have to made, for example through the control
of expenditure growth, as the scope for increasing the already-high tax burden
seems limited.([2]) The effect on
GDP and exports of the decline in the electronics and paper industry has not
yet been overcome. A large negative output gap has opened up and GDP remains
below its pre-crisis level. Nevertheless, there are some encouraging signs in
the form of new investments in the paper and pulp industry that should raise
productivity and support the launch of new products. Also, after the demise of
its mobile phone business, Nokia is re-inventing itself and contributing again
positively to Finnish growth.
 Graph 1.2:     Components of potential growth 
 Source: European Commission 
External sustainability
Finland’s external position
deteriorated, but remains sustainable. While
posting a record 8 % of GDP current account surplus in 2002, the current
account progressively turned into a moderate deficit in 2011 and broadly
stabilised thereafter. 
 Graph 1.3:     Current account, export market share (EMS) 
 Source: European Commission 
These developments were driven by the
substantial losses in export market shares that peaked in 2010, before getting
smaller in subsequent years (Graph 1.3). While the current account deficit
worsened Finland’s international investment position, this remains positive
thanks to assets accumulated in previous years (Graph 1.4). Notwithstanding the deterioration of
its net lending position, the likelihood of an abrupt adjustment in Finland’s
external position appears very low. External sustainability issues are further
discussed in section 2.1.
 Graph 1.4:     Net international investment position and external debt 
 (1) BPM6/ESA2010 (reserve assets excluded) Source: European Commission 
Competitiveness
Competitiveness has declined in recent
years, but the conditions for a recovery are in place. The significant decline in Finnish exports up to 2011 was due to
declines in both price and non-price competitiveness. Cost competitiveness
suffered from wage settlements failing to adjust to the new economic reality in
combination with declining labour productivity. In addition, despite the
government’s efforts and the business environment that has lots of favourable
features, the low rate of start-ups and other small businesses prolonged the
restructuring process of the economy to regain its competitiveness. There are
reasons to believe that things could get better going forward. Wage agreements
changed and provide for a more favourable development in unit labour costs. The
important restructuring in the electronics and paper industries should position
them better to take advantage of future growth. A big part of the Finnish
competitive edge has also been dependent on the highly educated labour force.
The current situation presents considerable challenges to ensure that
sufficient investments continue to be made into human capital to maintain the
high quality of the Finnish labour force and to provide it with new skills to
adapt to the changes in the economy. Competitiveness issues are further
discussed in sections 2.2 and 3.3.
 Graph 1.5:     Real effective exchange rates 
 Source: European Commission 
Investment
Investment in Finland is currently below
the levels observed in recent years. However, the
proportion of investment stood at 21.2 % of GDP in Finland in 2013, above
the euro area average of 19.6 %. Due to a lack of demand, investment in
equipment and non-housing construction (which is around half of overall
investment in Finland) is below the level that prevailed before the crisis.
Government spending cuts are restraining infrastructure investment, although
there are some major projects ongoing such as the extension of the metro line
and the airport railway connection in Helsinki. 
The main investment challenge is related
to the need to increase the restructuring and diversification of the production
side of the economy. Investment (not including
construction) has been lower than in similar economies over the past decade.
Although investment in R&D is among the highest in EU, the country still
faces challenges to convert high R&D investment into successful export
products and services. Limited investment in production capacity over recent
years could be one possible explanation for the lack of success in converting
the R&D inputs into viable products. Recent success stories can be found
mainly in the ICT-related services sector, such as the gaming industry. These
industries invest modestly in physical capital, but a well-functioning infrastructure
for companies in the service sector is a necessity. There are also particular
strengths in manufacturing, which is still driving a large part of growth in
real production. In manufacturing, much of the focus has recently been on
investing in clean technology products and a better use of ICT in manufacturing
processes.
There are also clear investment needs in
infrastructure. Finland could benefit from
diversifying its energy supply, particularly as it relies on a single gas
source — Russia. Investment in liquefied natural gas (LNG) terminals could be
one way of diversifying energy supply in the medium term. 
Private sector indebtedness
Private sector indebtedness stabilised
at a high level. Private sector debt increased
steadily over the first decade of this century reaching levels close to
170 % of GDP (Graph 1.6) and therefore above the Macroeconomic
Imbalance Procedure scoreboard indicator. Since 2010, private sector debt has
been broadly stable. Non-financial corporate debt accounts for about two thirds
of private sector debt (or about 120 % of GDP). The main driver of
corporate debt has been investment. Household debt increased noticeably before
the crisis. This stemmed from a rapid growth in mortgage loans linked to rising
house prices that could be attributed to increasing disposable income and
favourable financing conditions (low interest rates, tax incentives,
lengthening of maturities, increasing loan-to-value ratios). Since 2010,
household debt has stabilised at around 65 % of GDP. While high, debt
servicing does not seem to pose problems for corporates and households and
deleveraging pressures seem to be low. Private sector debt is further discussed
in section 2.3.
 Graph 1.6:     Breakdown of debt by sector (non-consolidated) 
 ESA 2010 Source: European Commission 
Public finance
Government finances deteriorated as
economic activity declined. Public finances have
been in deficit since 2009, not only nominally but also structurally, and
public debt has been increasing. Finland’s expenditure-to-GDP ratio has
continued increasing significantly since the beginning of the crisis while
revenues have stagnated. Policy makers had to strike a balance between
maintaining market confidence and credit ratings and not causing additional
loss of output due to overly restrictive fiscal policies as economic
performance worsened. Even if the government plans to reduce its deficit in
2015 and 2016, government debt is set to exceed the 60 % reference value
as from 2015.
Over the medium term, consolidation
efforts and structural reforms are necessary to close the sizable
sustainability gap. The fiscal sustainability risks
are considered as medium in the medium term and high in the long term. The
sustainability gap is mainly caused by the future ageing-related expenditure on
pensions and healthcare and long-term care.
General government revenue, in
proportion to the GDP, is already among the highest in the EU, so the scope for
increasing it further for fiscal consolidation purposes seems limited. Therefore, savings on the expenditure side, for example through
efficiency-enhancing reforms in the public sector, appear warranted (see
section 3.4). The growth friendliness of the tax system could be enhanced
(see section 3.1).
 Graph 1.7:     Public finance indicators 
 Source: European Commission 
Labour market
Unemployment has increased by less than
economic developments would suggest. Despite the
increase, unemployment (8.7 %) remains clearly below the EU average
(Graph 1.8). The labour market situation and
related challenges are further discussed in section 3.2.
 Graph 1.8:     Employment, unemployment and activity rate 
 Source: European Commission 
   
    
   
   
   
 Box 1.1: Economic surveillance process 
 The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors. In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation no. 1176/2011 — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014. Based on the 2014 IDR for Finland published in March 2014, the Commission concluded that Finland was experiencing macroeconomic imbalances requiring monitoring and policy action. In particular, the weak export performance during the last years, driven by industrial restructuring, cost and non-cost competitiveness factors, deserve continued attention. This Country Report includes an assessment of progress towards the implementation of the 2014 Country-Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Finland concerned public finances, administrative reform, labour market, market competition and competitiveness. 
  

 Table 1.1:       Key financial, economic and social indicators 
 (1) domestic banking groups and stand-alone banks. (2) domestic banking groups and stand alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and non-EU) controlled branches. (*) Indicates BPM5 and/or ESA95 Source: ECB, Commission services 
 Table 1.2:       MIP scoreboard indicators 
 Note: Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the first threshold concerns Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). Source: Commission services 
   
Current account and net external position
The Finnish current account has been
fluctuating in moderate negative territory since 2011. This followed a gradual deterioration from an exceptionally high
current account surplus of around 8 % of GDP at the start of the
millennium In the last two decades, the current account benchmark, i.e. the
estimated current account balance explained by fundamentals, was slightly
positive. That implies that both the much higher surplus amounting to around
8 % of GDP in 2000 and the recent negative balance reflect other factors
(Graph 2.1.1).
 Graph 2.1.1:   Breakdown of the Finnish external position (current and capital accounts) 
 (1) BPM6/ESA2010 (2) * European Commission Calculation, BOX 2.1.1. in the 2015 Country Report of Germany contains further information on the applied methodology Source: European Commission 
The external balance has been largely
driven by the trade balance. While Finland recorded
the third-highest trade surplus in the EU in 2000 on account of the preceding
surge of its export competitiveness, it vanished in the ensuing decade giving
rise to the largest cumulative deterioration in the EU-28 between 2000 and 2014
(Graph 2.1.2). Since 2011, the trade balance has
been slowly improving. In particular, according to trend balance-of-payments
data, the goods balance turned into a slight surplus in the Autumn of 2014.([3]) It has partly reflected positive terms-of-trade developments,
mainly on account of falling oil prices (Graph 2.1.3).([4]) 
 Graph 2.1.2:   Trade balance, EU-28 
 (1) Only Luxembourg and Ireland had a higher trade surplus in the EU-28 in 2000 Source: European Commission 
The improving competitiveness in the
1990s resulted in increasing national income and an improving current account. However, the private sector’s saving ratio has not improved
accordingly since higher incomes were largely channelled into government
savings. The budgetary balance improved in structural terms and its solid
surplus, together with the high current account surplus, led to the
accumulation of buffers to offset potential adverse shocks.
The current account deteriorated for two
reasons from the start of the millennium. First,
external factors — including financial integration, low real interest rates and
an improving growth outlook until 2008 — strengthened private sector
investment. Second, in response to the fall in external demand for various
Finnish products after 2008, Finland smoothed its domestic absorption
(consumption and investment together) by reducing domestic absorption by less
than the decline in national income.
 Graph 2.1.3:   Recent current account and trade developments, Finland, 12-month moving sum, quarterly data 
 (1) Balance of payments statistics (2) Customs statistics (3) Higher figure indicates improvement Source: Statistics Finland 
Just as for the previous boom period,
the government sector played a smoothing role in the adjustment process to the
external shocks that hit Finland, in particular after 2008. The private sector has remained a net lender in most years in view
of the solid saving position of the corporate sector (Graphs 2.1.4 and 2.1.5). Corporate sector investment ratio
dropped broadly in line with their declining saving ratio, while households
kept their saving ratio broadly stable, supported by increasing wages and
labour hoarding and by increased income transfers from the government. This
also allowed households to uphold their housing investment ratio, which remains
high in comparison with the EU (see section 2.3. on the housing market). The
bulk of the external shocks were absorbed by the public sector via the
increasing public expenditure ratio while the revenue ratio remained broadly
stable. The fiscal balance even turned into deficit in 2009 and has remained in
the red since then. This reflected both the impact of automatic stabilisers as
well as some fiscal stimulus. The latter resulted in the amortisation of the
previously accumulated budgetary surplus in structural terms.
 Graph 2.1.4:   Net lending/borrowing by sector, Finland 
 (1) ESA 2010 Source: European Commission 
 
 Graph 2.1.5:   Saving and investment of sectors, Finland (% of GDP) 
 (1) ESA 2010 Source: European Commission 
Finland’s net international investment
position (NIIP) remains in positive territory, although it has worsened since
2010. The NIIP turned positive in 2009 on account
of past current account surpluses and favourable valuation effects, mainly related
to equity holdings. Since 2010, the decline of the positive NIIP has reflected
the recently recorded moderate current account deficits (Graph 2.1.6).
 Graph 2.1.6:   Breakdown of net international investment position, Finland 
 (1) BPM6/ESA2010 (reserve assets excluded) Source: European Commission 
Current account developments also affect
economic growth. In fact, declining external demand
and net exports and the fall in corresponding investment, reduce economic
growth. The underlying developments that resulted in the worsening external
position also have adverse effects on potential growth (see section 2.2. on
non-price competitiveness developments).
Assessment of external sustainability and
vulnerability 
The Finnish external sustainability is
not a concern. The likelihood of an abrupt
adjustment to Finland’s external position is very low, despite the
deterioration of its net lending position over the last decade. First,
Finland’s net international investment position remains positive. Second, the
current account deficit over the last three years was relatively small, i.e.
between 1 % and 2 % of GDP. Third, a temporary increase in
government net borrowing can be justified as a shock- absorbing reaction, while
the persistent net borrowing position of the households sector mainly reflects
increases in the cost of housing, which has a flipside in a higher asset
position. Finally, according to the European Commission’s winter 2015 economic
forecast, some improvement in the external balance is expected in the coming
years on account of recovering trade performance and favourable terms-of-trade
developments.
However, the sharp deterioration of the
external balance in the 2000s highlights Finland’s vulnerability to external
shocks. It partly reflected the fall in global
demand for products in which Finland was heavily specialised. Against this
background, an assessment of the current vulnerability to external shocks is
made in the following paragraphs. It takes into consideration the openness of
the Finnish economy as well as the specialisation of its export sector.
Finland is an open economy, however, not
more open than other countries of a similar size.
Total Finnish trade (i.e. export and import together) is around to 80% of GDP,
which is lower than in some other Nordic countries (such as Sweden and Denmark)
or even in Germany. This finding is confirmed by a comparison based on the
domestic value added content of exports (Graph 2.1.7). Also, both the inward and outward
foreign direct investment stock was close to the EU average in 2013. Although
the outward activity of Finnish multinationals is high, it is comparable to multinationals
from other Nordic countries. While openness exposes a country to external
shocks in general, the vulnerability to external shocks is mainly determined by
the degree of specialisation of the export sector and the corresponding
exposure to country-specific, i.e. asymmetric external shocks.
 Graph 2.1.7:   Domestic value added content of exports, EU-28, 2009 
 (1) Data is not available for Croatia and Cyprus Source: OECD, European Commission 
The Finnish export sector has recently
become more balanced while it was highly concentrated at the turn of the
millennium. This mainly reflects the impact of
negative global demand shocks, which hit sectors and products (like mobile
handsets) that previously accounted for highly disproportionate shares of
Finnish exports. The proportion of top-10 export goods in total Finnish exports
decreased to 44 % in 2013 from 57 % in 2000. Even so, it still
exceeds the corresponding indicators in Sweden (35 %) and Denmark
(29 %) (Graph 2.1.8). Similarly, the Herfindahl-Hirschmann
index of export goods suggests that the concentration of the Finnish export
structure has decreased to a level that is similar to other small economies in
the EU-28 (Graph 2.1.9). In addition, the share of top-10
firms in exports has also decreased to 32 % in 2011 from more than 40% in
2008, although this ratio is still among the highest in the EU-28 and exceeds
the figures for several other small economies, like Austria, Latvia and
Slovenia (Graph 2.1.10).
 
 Graph 2.1.8:   Share of top-10 export goods in total export (%) 
 (1) Based on SITC Rev 3, which includes 255 product categories Source: UNCTAD, European Commission 
 
 Graph 2.1.9:   Concentration of export good structure, 2013 
 (1) Various years for Finland (2) Specialisation is measured by Herfindahl-Hirschmann (HH)index, based on SITC Rec 3 categories Source: UNCTAD, European Commission 
 
 Graph 2.1.10: Share of top-10 enterprises in total export, 2011, (%) 
 Source: OECD, European Commission 
Another reason of the vulnerability of
Finland to asymmetric external shocks is its export sector’s specialisation in
products that has relatively low share in international trade. In 2013, Finland’s diversity index of goods was 0.54
compared with the rest of the world, which was the sixth highest among the
EU-28 countries and which has not changed significantly in recent years.([5]) Although this diversity index cannot be assessed as exceptional,
the diversity indicator of various other smaller economies in the EU-28,
including Sweden, Denmark, Austria and the Baltic countries, is lower —
flagging an export product mix that is more similar to the world export market
structure. In particular, the share of wood, paper and basic metal production
is relatively high in Finnish exports, according to the revealed comparative
advantages indices calculated based on both gross export values and domestic
value added for foreign demand.
Overall, Finland continues to be
relatively exposed to asymmetric external shocks due to its still relatively
high specialisation, even if it turned to be less exceptional.([6]) In the short term, the contraction of
the Russian economy may adversely affect Finnish exports, as Russia is
Finland’s third-largest export destination (see Box 2.2.2. on the impact of
Russian economic developments on Finland). Yet, by the same token, an eventual
recovery in Russian economic growth would benefit Finland in the medium term.
Currently, the global economic cycle is having a strong effect on  Finnish
export performance due to the high proportion of investment and intermediate
goods in its total exports, for which demand is more cyclical than for consumer
goods. Also, Finnish exports are concentrated on high-quality products, which
more closely follow the economic cycle than lower-quality products.([7])
Nonetheless, Finland’s shock-absorbing
capacity decreased due to the amortisation of previously achieved external and
budgetary surpluses. Therefore, the importance of
powerful adjustment to external shocks has further increased. Adjustment is necessary
to regain export competitiveness and to accumulate buffers, such as current
account surpluses, in good economic times that can be used for absorbing
external shocks in bad economic times. Accordingly, in the following sections
the first encouraging signs of the current economic restructuring are
documented, followed by analyses of the cost and non-cost factors, a part of
which compromise Finland’s adjustment capacity.
Economic restructuring
Services have gradually increased in
importance while secondary production — including manufacturing, — has
decreased. In 2000, secondary production ([8]) reached its highest share in Finnish
gross value added (GVA) over the past 30 years. In contrast to global trends,
the share of secondary production remained relatively stable at about one third
of GVA between 1990 and 2008 while the share of private services increased from
roughly 40 % in 1990 to 45 % in 2008 (Graph 2.2.1). During the 2008-09 recession, the
secondary production fell below 30 % and has been steadily declining
since then. Partly due to the fall in secondary production, private services
account for roughly 50 % of GVA. Public services in GVA have remained relatively
stable at around one fifth.
 Graph 2.2.1:   Structure of gross value added by industrial aggregates, 1975-2013, Finland 
 Source: Statistics Finland, European Commission 
In 2000, the largest industry within
secondary production — manufacturing (NACE code C) — reached its highest level
(27.6 % of GVA) over the past 40 years. Although real production in
manufacturing has decreased rapidly in recent years, the latest data shows that
manufacturing still accounts for 16.6 % of GVA in Finland, which is
slightly above the euro area average of 15.9 %.
 Graph 2.2.2:   Gross value added in basic prices, current prices, 1990-2013 
 Source: Statistics Finland, European Commission 
 
 Graph 2.2.3:   Real gross value added in basic prices in manufacturing 1990-2013 
 Source: Statistics Finland, European Commission 
The real GVA of manufacturing decreased
by nearly 30 % between 2008 and 2012, mainly due to downsizing of
electronics. In this period roughly two thirds of
the electronics sector production disappeared, largely on account of the
contraction of Nokia’s handset unit. The decline of the electronics sector has
come to an end in 2013 when the industry was able to increase the GVA volume by
3.6 %. Although the changes in 2008-12 were significant and had negative
economic effects, the electronics industry still produces twice as much real
GVA than it did 20 years ago. It has also generated a lot of accumulated
knowledge and skills in the economy that could be reallocated to new companies
and productive jobs either in manufacturing or for example in ICT service industries.
The firm churning rate by industry — that is sum of firm creation and
destruction rates — was at end-2013 above the 2010-12 average in the production
of electronic and electrical products, and in several information and
communication services industries.
Forest industries (woodworking and paper
industries) in Finland have reduced their production capacity between 2007 and
2012 as a response to lower global demand. This led
to a 25 % loss of real GVA of this industry. However, the production of
forest industries has remained rather stable since 2010. Over recent years,
forest companies have increased their R&D expenditure to close to 3 %
of their gross value added. The R&D expenditure has thus roughly doubled
compared with 2000 and as a result, new marketable products such as wood-based
biofuels have already emerged. Furthermore, it is reasonable to assume that the
most intensive downsizing period has passed in forest industries. In addition
to the increase of the production of new forest based products, there are plans
to increase the production of softwood pulp, for which the global demand is
projected to increase. 
Expanding industries are found in
manufacturing and in the private services sector.
Within manufacturing, the chemical industry has especially been growing
steadily over recent years. The metal industry has had difficulties since the
global investment boom ended in 2009, but in 2014, among manufacturing
industries, companies in the metal industry were able to increase their order
books the most. In the private service sector, the information and
communication services industry has clearly been expanding. Its real GVA almost
doubled between 2000 and 2013 and the 2008-09 recession went largely unnoticed
by the industry. In addition, professional, scientific, technical,
administration and support-service activities have continued to grow. Overall,
in 2012, the real GVA of private service industries regained their pre-crisis
level. In 2014, following a slight decline in 2013, private services are
expected to have grown again. 
 Graph 2.2.4:   Productivity growth in manufacturing industries (%, y-o-y) and growth contributions by sub-industries (percentage points), Finland 
 (1) Labour productivity growth is measured as change in ratio of real gross value added at basic prices to total hours worked by industry. Source: Statistics Finland, European Commission 
The steep fall in production of the
electronics and forest industries depressed labour productivity substantially
with an adverse impact on competitiveness indicators, but recently,
productivity has started to recover. The
electronics industry was the largest positive contributor to labour
productivity growth between 1995 and 2008. In 2009, only chemical industries
were able to increase labour productivity while other manufacturing industries
recorded deep falls in production relative to labour input. After the crisis,
most of the industries recovered and especially the chemical and forest
industries saw their productivity increasing in recent years. 
Plant-level micro-data on labour
productivity trends shows that productivity within Finnish firms is not lagging
behind Nordic peers. The productivity of Finnish
manufacturing companies has moved broadly in line with Swedish or Danish peers
over 1995-2011. For example, both Finnish and Swedish manufacturing companies
enjoyed a long period of increasing labour productivity up until the global
economic downturn in 2008-09. After the downturn, productivity recovered in
both countries. Since 2005, the change in the company structure within
industries has increased in Finland. This has accelerated the growth of labour
productivity. The phenomenon known as ‘creative destruction’ has accelerated
the growth of labour productivity in Sweden and Norway already since 1995. It
means that less productive firms lose their market share while firms that are
more productive gain and through the process, resources, such as labour, are
allocated more efficiently than before, thus increasing aggregate labour
productivity.([9]) 
Overall, recent developments suggest
that the structural change of production is in a phase where production is no
longer declining rapidly in certain industries.
However, it will take some time before the expansion of industries fully makes
up for the recent fall in gross value added.
Price and cost competitiveness 
Since 2005, the price level in Finland
measured by the GDP deflator has increased at one of the highest rates in the
core euro area, although the nominal price level in Finland is relatively high. In recent years, compensation of employees and indirect taxes net
of subsidies have pushed costs higher while operating profits, mixed income and
returns on capital have been squeezed (Graph 2.2.5). Compared with 37 industrial
competitor countries, the real effective exchange rate based on the GDP
deflator shows that the relative cost level has risen over the past five years.
 Graph 2.2.5:   Change of GDP deflator (%, y-o-y) and contributions to growth, (pps.) - —  Finland 
 Source: European Commission 
The wage agreement in 2013 set moderate
wage increases for the period 2014-15 and helped to halt the deterioration in
relative nominal unit labour costs. Against the
background of the deterioration in cost competitiveness over recent years, the
recent stabilisation could be regarded as a first step in the right direction.
Graph 2.2.6 also shows that in recent years the
nominal effective exchange rate for Finland has appreciated. Although the
EUR/USD exchange rate has depreciated recently, the euro has appreciated
strongly against the Russian rouble and against the Swedish krona, two of
Finland’s largest trading partners. Hence, in the case of Finland, the nominal
effective exchange rate might not support cost-competitiveness as much as it
supports some other euro area countries.
 Graph 2.2.6:   Change in competitiveness (%, y-o-y) and contributions from nominal effective exchange rate and total economy nominal unit labour costs, percentage points (pps.), — Finland 
 Source: European Commission 
While labour productivity growth more
than offset wage increases and falling export prices in the Finnish
manufacturing sector prior to 2008, cost competitiveness deteriorated
afterwards. In 2003-10, Finland witnessed falling
export prices compared with competitor countries due to rapid price falls in
the electronics sector. The fast growth of labour productivity in relation to
competitor countries, and the consequently falling relative unit labour costs
in manufacturing, helped to sustain market shares in the international market.
The ratio of relative export prices to relative manufacturing unit labour costs
for Finland and peer countries is shown in Graph 2.2.7. For example, a falling curve
indicates that a rise in relative unit labour costs has been larger than a rise
in relative export prices, squeezing the profits of the manufacturing firms.
Lower profits-to-turnover ratio reduces the economic incentives to invest in
new production capacity.
Before 2008, Finnish manufacturers were
able to keep their unit labour costs in check with respect to export prices
(Graph 2.2.7). Afterwards, especially in 2009 and
2012, Finnish unit labour costs increased rapidly relative to competitor
countries and relative to export prices. In 2013-14, the increase in unit
labour costs and consequently deterioration in the Finnish cost competitiveness
came to halt. The downsizing of the electronics sector and consequently the
rapid deterioration in relative unit labour costs in manufacturing, explains
most of the deterioration in export prices relative to manufacturing unit
labour costs in 2008-12.
 Graph 2.2.7:   Ratio of export price deflated REER to manufacturing unit labour cost deflated REER, 1999-2014 
 Source: European Commission 
The non-traded sector has added to the
deteriorating cost competitiveness. For Finland the
ratio of the export-price-deflated real effective exchange rate (REER) to the
total economy unit-labour-cost-deflated REER (Graph 2.2.8) falls below the ratio vis-à-vis
manufacturing unit labour-costs-deflated REER (Graph 2.2.7). This indicates that unit-labour
costs of the total economy have risen faster than in 37 industrial competitor
countries. Although the indicator in Graph 2.2.7 suggests that the manufacturing sector
has recently been able to stem the loss in competitiveness, the divergence of
the open sector and developments regarding total economy unit labour costs
reveals that cost pressures on exporting firms stemming from the economy’s
closed sector could still weigh on external competitiveness. Compared with peer
countries, Finland’s position deteriorated especially in 2008-2009.([10])
 Graph 2.2.8:   Ratio of export price deflated REER to total economy unit labour cost deflated REER, 1999-2014 
 Source: European Commission 
Non-price competitiveness
 External
competitiveness challenges
The deterioration of Finland’s trade
balance  after 2002 indicates underlying weaknesses with regard to
competitiveness. The trade indicators have
reflected three simultaneous developments. Understanding them requires
distinguishing export and import changes as well as separation of
country-specific and global developments.
The first development that had a
decisive impact on the trade balance is the worsening export performance,
mainly on account of decreasing demand for selected Finnish products. This can be detected in the fall in the Finnish export market
share. Although its deterioration has recently became smaller, it was
especially significant in 2009 and 2010. The cumulated loss in market shares
amounts to more than 32 % between 2008 and 2013, which is the largest in
the EU-28, as also indicated by the latest Macroeconomic Imbalance Procedure
scoreboard (Graphs 2.2.9 and 2.2.10). Importantly, before 2008, figures
for the Finnish and the euro area export market share changed in line with each
other, except for the crisis period in Nordic countries at the beginning of the
1990s;  the Finnish market share started to suffer more only in 2009
(Graph 2.2.11).
 Graph 2.2.9:   Export market share development (%) 
 (1) Data for five year cumulative change are not available for Spain, Greece and Slovenia Source: European Commission 
 
 Graph 2.2.10: Export market share, Finland, annual change (%) 
 Source: Eurostat 
 
 Graph 2.2.11: Export market share, Finland, compared with the export market share of the euro area, (%) 
 (1) Total economy without Nokia is an illustrative estimation by the European Commission Source: UNCTAD, European Commission, Ali-Yrkkö, Jyrki (ed.), Nokia and Finland in a Sea of Change, 2010, ETLA B 244. updated, http://www.theglobeandmail.com/report-on-business/economy/economy-lab/how-finlands-economy-became-hooked-on-nokia/article618622/ 
The decline in the Finnish export market
share mainly stemmed from the collapse of the export market share of goods, which decreased by 34.5 % (i.e. from 0.68 % to
0.45 %) between 2008 and 2013. In 2013, Finland seems to have made gains
in its export market shares in goods for the first time since 2007. But since
this was outweighed by a further deterioration in the export market shares of
services, overall a further drop was recorded in 2013. In addition, not only
did exports decline but also the domestic value-added content of exports
(Graphs 2.2.12 and 2.2.13).
 Graph 2.2.12: Domestic value-added content of export, Finland (% of GDP) 
 Source: AMECO, OECD, European Commission 
 
 Graph 2.2.13: Domestic value added of foreign demand, change between 2000 and 2009, % of GDP 
 Source: OECD, European Commission 
Finnish export market shares decreased
in most product categories between 2000 and 2013.
Importantly, products with the largest export share in 2000, i.e. electrical
and electronic equipment, paper, selected machineries and wood products, were
among those that witnessed the biggest decline in their market share. The same
sectors explain the fall of value added in final foreign demand amounting to
5 % of GDP between 2000 and 2009, which was only partly counterbalanced
by the improving performance of business services. These products were also
among those that globally lost the largest share in trade (Graph 2.2.14).
 Graph 2.2.14: Export developments by product category between 2000 and 2013 
 (1) Based on Harmonised System of World Customs Organisation, 2-digit level categories (2) Surface of bubbles represents the share of product category in Finnish exports in 2000 Source: Comtrade, European Commission 
Similarly to its decisive role in the
boom period, the collapse of Finnish mobile handset exports accounts, in
itself, for around half of the total decrease in the Finnish export market
share of goods. The share of mobile handsets in the
Finnish goods export declined from 13 % in 2000 to 1 % in 2013. This
also reduced the share of high-tech products in Finnish exports from around
20 % at the beginning of the 2000s to around 5 % in 2013. 
Filtering out the impact of the trade in mobile handsets, the accumulated
market share decline would have been close to 20 % between 2008 and 2013,
i.e. still the largest in the EU-28. It illustrates that the loss in export
market shares also concerned other goods and reflected an adverse change in the
international demand structure from a Finnish point of view. The specialisation
of the economy in products whose share decreased in total world trade, i.e. the
composition effect stemming from the changing structure in world demand,
explains one-third of the total fall in the export market share (Graph 2.2.16).
Although Nokia still has a significant
impact on the Finnish economy, its role in the Finnish economy had been much
more significant before it was severely hit by competitors on several fronts as
of 2007.  Around the turn of the millennium, Nokia
directly made 3-4% of the Finnish GDP and accounted for around 30% of R&D,
1% of employment and more than 20% of total export of the country (Graph 2.2.15). Also, e.g. in 2003, it paid close
to 23% of the total corporate tax. Despite the dominant role of Nokia in mobile
handset production, the Finnish mobile telephone export never exceeded 10% of
the world export. It suggests that the majority of the manufacturing and final
assembly of the Nokia mobile phones took place abroad. Yet, Nokia usually
created and recorded 40-50% of the total value added of its mobile handsets.([11]) In addition, the bulk (around 80%) of the value added created by
Nokia was recorded in Finland in the first half of 2000s. Nevertheless, Nokia's
share in the global value chain decreased over time and in the case of basic
models, which targeted emerging markets and which were not only produced but
also designed overseas, Nokia's share decreased to around 20%.
 Graph 2.2.15: Nokia's contribution to the Finnish GDP (%) 
 Source: Ali-Yrkkö, Jyrki (ed.) Nokia and Finland in a Sea of Change 2010, ETLA B 244. updated 
A shift-share analysis of factors behind
trade developments, which also takes into account geographic factors, can
nuance the picture further. It shows that the bulk
of the fall in the export market share between 2000 and 2013 stemmed from the
deteriorating performance in product and geographical markets. Initial product
specialisation also negatively affected the export performance. These factors
were slightly counterbalanced by the initial specialisation in fast growing
economies. However, these data have yet not reflect the impact of the current
contraction of the Russian economy, to which Finland is more exposed than most
of other EU countries (Box 2.2.1 contains further details on the
economic relationships between Finland and Russia.).
 Graph 2.2.16: Components of change of Finnish export market share between 2000 and 2013 
 (1) Extended slices represent positive contribution Source: Comtrade, European Commission 
The second main driver of the
deteriorating current account and trade balance is the growth in imports for
domestic demand purposes, although this factor is often overlooked. Import growth was boosted by the increasing consumption of
households, in particular after 2008 (Graph 2.2.17) and by the growing import intensity
of domestic demand from 23 % in 2000 to 26 % in 2011. Between 2000
and 2008, the increasing consumption ratio has reflected growing real
consumption. Although real consumption of households declined in 2009, it
quickly recovered in 2010 and 2011 and broadly stabilised afterwards. This, in
parallel with a GDP that is still below its pre-crisis level, resulted in an
increasing import ratio. After 2009, consumption was supported by improving real
gross disposable income, which increased until 2011 and stabilised afterwards
in light of the slow labour market adjustment (in both wages and employment) to
deteriorating growth developments and due to enhanced current transfers to
households. In short, despite the decline in national income, households could
maintain their real consumption without decreasing their saving ratio.
 Graph 2.2.17: Consumption of households and net exports (% of GDP) 
 (1) Net export (national accounts) is presented on inverse axis Source: European Commission 
Export and import developments
contributed broadly equally to the deterioration in the trade balance after
2000. This is suggested by the calculation that
filters out from the foreign value-added content from exports and the
export-related imports from the total import.([12]) In most countries, increasing specialisation lifted both export
and import ratios. Also, the improvement of the export component usually
over-performed the import component and so net exports typically improved in
this period (Graph 2.2.18). However, in Finland, in parallel
with the worsening export performance, imports for domestic demand kept growing
and net exports became negative by 2011. Overall, the deterioration of net
exports by 10 % of GDP reflected a lower export component of 4.8 %
of GDP and a higher import component of 5.2 % of GDP (Graph 2.2.19). 
 Box 2.2.1: Foreign direct investment, trade linkages and especially energy tie Finland close to Russia 
   ·         Finnish foreign direct investment in Russia has increased over the last decade and at a faster rate than the total outward Finnish FDI stock. This has been a reflection of the business opportunities with above average profits seen in Russia. In 2013 the stock of direct investment stood at 1.4% of Finnish GDP, Russia being the 6th largest destination of FDI from Finland. Finnish companies operate mainly in Russia in retail, construction and manufacturing industries. The Russian investment stock in Finland has remained stable at 0.4% of GDP over the past 5 years. In 2013, Finland generated net primary income from direct investments in Russia of about 0.3% of GDP (in line with a very high rate of return of 24% in 2013). ·         Russia is Finland's third-largest export destination. Finnish exports to Russia consist of various manufactured products, from food stuff to capital goods. They amounted to about 10% of total exports in 2013. Russia accounts for around one fifth of total foreign imports of intermediate inputs used in producing Finnish exports. In services trade Finland generates most of the income in tourism. ·         Russia is Finland's first source of imports, mainly of raw materials, especially of crude oil and natural gas. In 2013, the value of crude oil and natural gas imports amounted to roughly 70% of total imports from Russia. Finland imports 100% of its natural gas and nearly 90% of its oil and coal from Russia. ·         Oil refineries in Finland are specialized in refining Russian oil. Russian oil is somewhat cheaper, but requires more processing than other oils in the market. The majority of transport fuels used in Finland are refined domestically, and more than half of the output of the refineries is exported. Net exports of refined petroleum products derived from petroleum coming from Russia stood at 1.4% of GDP in 2013. ·         Overall, energy dependency on Russian energy commodities amounts to around 40%. Domestic energy sources such as hydro power and wood fuels account for about 35% of the energy mix. Oil represents roughly one fifth, while natural gas in Finland's energy mix is currently below 10%. Close to 70% of Finland's gas consumption is used for district heating and electricity; in urban areas, district heating is virtually the only way in which households warm their homes.     
 Graph 1:Foreign Direct Investment from Finland to Russia and Energy Imports tie Finland close to Russia. 
 Source: European Commission, Statistics Finland, Customs Finland 
 Graph 2.2.18: Export and import component, EU-28, change between 2000 and 2011 (% of GDP) 
 (1) Distance from the red neutrality line indicates net export change Source: European Commission 
  Graph 2.2.19:            Export and import component, Finland (% of GDP) 
 Source: Eurostat, European Commission 
Finally, some global phenomena have
affected Finnish gross trade numbers, but not the trade balance. In particular,
world trade has permanently increased in light of
the growing specialisation and international division of labour. Consequently,
both the export and import ratios of Finland roughly doubled over the last two
decades. Also, exports represent an increasing share of value added in other
countries (Graph 2.2.20). In addition, the export market
share of developing countries has increased at the expense of the developed
countries. Specifically, the export market share of developed countries fell
from 66 % in 2000 to 51 % in 2013.
 Graph 2.2.20: Export and import ratio as well as foreign value-added content of exports, Finland (% of GDP) 
 (1) % of export Source: WIOD, European Commission 
Furthermore, as a reaction to
supply-side shocks, many Finnish companies restructured and relocated their
production in order to optimise their participation in global value chains. This required initial foreign direct investment abroad, which took
place primarily at the turn of the millennium (Graph 2.2.21). Also, the relocation of production,
other things being equal, reduced Finnish gross trade indicators and the net
export of goods. In line with this development, the Finnish goods export ratio
lost its impetus after 2000. At the same time, this strategy enhanced the
export of services, which kept growing between 2000 and 2008 and doubled in
this period (Graph 2.2.22). In this way, despite the
globalisation of production, companies could still create and record the bulk
of the value added in their Finnish headquarters. Consequently, until 2008, the
contribution to Finnish GDP of the domestic value added in exports remained
broadly stable (Graph 2.2.12). Overall, relocation had only a
limited impact on the GDP and trade balance of Finland. It also explains the
limited improvement in the income balance of the current account, since the
record of value added in subsidiaries abroad and the subsequent profit transfer
to the home country was probably not dominant in the case of Finnish
multinational companies.
 Graph 2.2.21: Finnish foreign direct investment vis-à-vis the world and EU-28 (%) 
 Source: OECD 
 
 Graph 2.2.22: Export of goods and services, Finland (% of GDP) 
 Source: European Commission 
Assessment
of entrepreneurship
In advanced economies, beyond the
traditional production factors, entrepreneurship capital has become an
essential element of comparative advantage and growth. Depending on some conditions, entrepreneurship capital — i.e. the
milieu of agents and institutions that is conducive to the creation of new
firms — has a favourable impact on growth. It creates knowledge spillovers,
increases the number of businesses, enhances competition, and instils more
diversity among firms. Nevertheless, even among developed countries, the level
of entrepreneurship and the distribution of firms by size can be different from
country to country because of various reasons, including the business
environment and cultural aspects.
The role of entrepreneurship and
start-ups has recently increased, following a long downward trend, in
particular in innovation-driven economies, according to studies. This is because of the way dispersion of innovation has changed and
the role of entrepreneurs in it has increased. The increasing role of
entrepreneurship capital reflects that it is not straightforward that knowledge
or R&D always spills over due to its mere existence and the capacity to
harness new ideas by creating new enterprises is also essential to economic
output. In other words,  ‘entrepreneurship capital may be a missing link in
explaining variations in economic performance’.([13])
Young businesses tend to create a
disproportionate number of jobs, in particular in the course of their start-up
phase. Conversely, the largest contribution to job
destruction comes from the group of small and mature firms. Importantly, while
less than 10 % of start-ups grow above 10 employees, they provide a large
part (sometimes even the majority) of total net growth of employment.([14]) Also, empirical analyses suggest that the high turnover rate of
firms may increase competitiveness and growth potential for those who survive.
Overall, Finland has structural
competitive strengths on which to build. Comparing
the competitiveness indicators of various international organisations shows
that Finland tends to do well when long-term structural indicators like
education, R&D investment and quality of public administration are used.
Thus, the country is consistently among the top performers for example in the
World Economic Forum (WEF) rankings. However, the country scores less well
(landing in the middle) when short-term cost competitiveness indicators are
emphasised, like in the rankings of the Institute for Management Development
(IMD). Ideally, for a country to be an attractive investment destination, both
structural factors and the cost basis should be competitive. ([15])
The basic environment for
entrepreneurship is good. According to the Global
Entrepreneurship Monitor (GEM), entrepreneurship continues to benefit from
Finnish governmental policies, easy access to financing and exceptional
education. In addition, according to the latest GEM report, Finnish people
perceive good business opportunities, even if there has been some decline in
perceptions in line with adverse economic growth developments. In addition, the
perception of entrepreneurial capabilities needed for starting a business in
the adult population in Finland (33 %) is similar to the average for
Nordic countries (35 %), although lower than the average in
innovation-driven economies (41 %).
Finland is among the innovation leaders,
and its export sector is specialised in top-quality products (Graph 2.2.23). Its innovation performance
increased up until 2011 and remained stable afterwards, according to the
European Commission’s Innovation Union Scoreboard 2014. Finland performs above
the EU average for most scoreboard indicators. Compared with other EU
countries, relative weaknesses relate to the involvement of smaller firms in
innovation and in joint private-public co-publication and the openness of the
research system.
 Graph 2.2.23: Innovation and specialisation on top-quality export products 
 (1) EU-28, China, United States and Japan Source: Innovation Union Scoreboard 2014, European Commission calculation based on COMEXT (EUROSTAT) and ORBIS data 
Nevertheless, the favourable business
environment, the quality of institutions and the corresponding cultural and
entrepreneurial attitudes cannot by themselves ensure higher levels of
entrepreneurship.([16]) Currently, less than 10 % of small businesses ([17]) — i.e. businesses that employ 50 people or less  — are start-ups
in Finland, which is the second-lowest ratio in the DynEmp database.([18]) Conversely, close to 60 % of small businesses are older than
10 years, which is also an exceptionally high ratio (Graph 2.2.24). Compared with other countries, that
means a relatively large share of small companies represents businesses that do
not grow but still survive. Also, around 40 % of firms (around 38 %
in manufacturing and 42 % in services) never grow above one employee in
Finland, which is the highest ratio among the 18 countries studied (Graph 2.2.25.).([19]) The high share of small businesses that are also relatively old in
general may indicate a misallocation of resources and may limit productivity
growth as suggested by studies on misallocation.
 Graph 2.2.24: Age composition of small businesses (%) 
 (1) Average over time, firms below 50 employees Source: C. Criscuolo, P. N. Gal and C. Menon (2014a), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers no. 14 
 Graph 2.2.25: Share of employment in firms never growing above one employee (manufacturing) 
 Source: C. Criscuolo, P. N. Gal and C. Menon (2014a), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers no. 14 
The proportion of young companies — i.e.
less than five years old — in small businesses is low in Finland for various
reasons. First, the start-up rate, i.e. the
fraction of start-ups among all firms, is the second lowest in the DynEmp
database for every year since 2001 (Graph 2.2.26). Second, the growth
potential of firms measured by employment is low compared with other
countries.([20]) Third, a
relatively large proportion of young Finnish firms does not grow bigger in
terms of employment and still survive. Overall, in Finland, the contribution of
young small and medium-sized firms to gross job creation is the lowest among
the observed countries. Also, Finland and Italy are the only countries where
the contribution from entry of firms to job creation is smaller than the
contribution from young incumbents’ growth.
In addition to these long-term
indicators, Finland’s small and medium-sized enterprises (SMEs) have been slow
to recover from the 2008 crisis, in particular in employment terms. For value added, Finland´s SMEs have recovered relatively well from
the initial shock; however, the number of employees fell by more than 2.1 % between 2008 and 2013. The jobless
recovery of the Finnish SME sector is forecast to continue at least in 2015.
While value added is expected to continue to grow slightly, SME employment is
forecast to decrease by more than 1 %.The number
of SMEs is expected to continue to fall.
Against this background, the Finnish
government has implemented several measures to increase entrepreneurship and
support start-ups. Finland´s profile in
implementing the Small Business Act (SBA) continues to be one of the strongest
of all Member States.([21]) The results
of these efforts cannot be assessed ex-post yet since hard data are available
only up until 2011. Nevertheless, soft — i.e. survey data — are accessible for
recent years. According to the latest GEM survey, only 9 % of the
non-entrepreneurial adult population has entrepreneurial intentions in Finland.
This is significantly below the 14 % average of innovation-driven
economies (for instance, USA 17 %, Sweden 11 %). Although established
business ownership in Finland is at the average of innovation-driven economies,
nascent entrepreneurship ([22]) is one of
the lowest among the innovation-driven countries (2.7 % against
4.7 %). Also, early-stage entrepreneurial activity and non-established
renewal of entrepreneurship are below the average.([23])
 Graph 2.2.26: Start-up rates 
 (1) The graph reports start-up rates (defined as the fraction of start-ups among all firms) by countries, averaged across the indicated three-year periods. Start-up firms are those firms which are from 0 to 2 years old. Source: C. Criscuolo, P. N. Gal and C. Menon (2014a), “The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD Science, Technology and Industry Policy Papers no. 14 
Even more striking is that few Finnish
entrepreneurs plan to expand employment significantly. In 2014, only 15.7 % of early-stage entrepreneurs intend to
employ at least 5 people in the next five years. This figure is below the average
for the innovation-driven economies and the average of the previous years
(Graph 2.2.27).
 Graph 2.2.27: Growth expectation of early-stage entrepreneurs in innovation-driven economies 
 (1) Percentage of early-stage entrepreneurs who expect to employ at least five employees in five-years'’ time (2) For 2001-2008 and 2009-2014, figures are indicated only if at least two data points are available Source: Global Entrepreneurship Monitor 
Similarly, only 22 % of
early-stage entrepreneurs were innovatively oriented in 2013. This is again
clearly below the average for innovation-driven economies. This represents a further deterioration since 2012. This is
surprising since, based on GEM surveys of 30 countries, there is a positive
relation between innovative entrepreneurship and tertiary education,
self-confidence, opportunity perception — and a positive impact of GDP per capita
on the probability of innovation among nascent entrepreneurs, i.e. the very
that factors are among the strengths of the Finnish economy.([24])
Also, the international orientation of
Finnish early-stage entrepreneurs is low. Only
11 % of them expect the share of international customers to be more than
25 %, which was one of the lowest values among the innovation-driven
economies in 2013. This is again remarkable, since the relevant literature ([25]) revealed (i) significant positive relationship between measures of
export-oriented early-stage entrepreneurship and the level of per capita income
for various Asian countries and (ii) positive correlation between high-growth
expectation entrepreneurial activity and per capita income ([26]). The relatively low intention of Finnish early-stage entrepreneurs
to expand internationally does not seem to reflect the cyclical position of the
economy since similar figures also characterise the pre-crisis period.
Surveys reveal some reasons behind the relatively
low entrepreneurship capital in Finland. In
Finland, only 24 % of respondents say they favour self-employment,
according to the latest Eurobarometer survey on entrepreneurship, which was
carried out in 2012. This ratio is lower than the EU average of 37 % in
2012 and also substantially lower than the previous Finnish ratio of 41 %
recorded in 2009. Although the increasing preference in recent years to being
an employee was a common development among EU Member States and may be related
to negative economic conditions, the fall of 17 percentage points is twice as
high as the reduction of 8 percentage points at EU level. The preference to
being an employee opposed to being self-employed is a structural characteristic
in Finland: it was already revealed in good economic times by previous surveys,
such as the 2007 Entrepreneurship Survey of EU-25. 
With regard to setting up a business and
becoming self-employed, Finnish people have various concerns. They are more afraid of having irregular or non-guaranteed income
(41 % against 33 %) and devote much more energy or time to the
actual setting-up (33 % against 13 %) than the EU average.([27]) A third of respondents said that becoming self-employed in the
next five years would have been feasible, which slightly exceeds the EU
average. Those Finns who preferred self-employment identified the most frequent
advantages to be independence and self-fulfilment, and freedom to choose the
place and time of working. The reference to the latter significantly exceeded
the EU average (47 % against 30 %). However, better income
prospects were a less dominant motive than at EU level. These results in the
2012 entrepreneurship survey confirmed the outcome of previous surveys. It is
interesting to note that among those who had left Nokia, fewer people choose
companies that are less than two years old (start-ups). While this ratio was
34 % between 1995 and 2000, i.e. at the time of an IT-boom never seen
before, it decreased to 15 % between 2008 and 2010 ([28]). This supports the findings of the attitude survey.
The 2013 Global Entrepreneurship Monitor
report for Finland concluded that entrepreneurial activity in Finland
‘struggled to maintain its position in the middle-league. Despite the supportive policies and environment for entrepreneurship,
positive perceptions on business opportunities and needed competences do not
turn into start-ups and new businesses. Finland may have potential
entrepreneurs with new ideas and skills, but lacks the ones who take the
initiative and exploit the opportunities.’
In conclusion, the low birth rate of
start-ups and the large number of businesses that stay small imply that the
process of creative destruction is less powerful.
It also limits the favourable impact of the generally outstanding business environment.
Indebtedness
Private sector debt has stabilised at a
high level. The increase over the past decade was
particularly pronounced during 2007-09. Over 2010-13, the debt ratio was stable
between 169-170 % of GDP. Private sector debt is mainly (close to two
thirds) composed of non-financial corporation debt (NFCs), as indicated in
Graph 3.3.1. Finnish households and non-financial corporations are relatively
highly leveraged as seen in the high debt-to-assets ratios. However, these
ratios have not increased in Finland in recent years. 
 Graph 2.3.1:   Breakdown of debt by sector (non-consolidated) — Finland 
 Source: European Commission 
High levels of debt do not appear to be
posing near-term risks or challenges to the economy. Although the level of debt is relatively high, servicing costs are
currently low thanks to the very low interest rates. High levels of corporate
debt have not been a factor hampering the restructuring of the economy, as
access to finance remains good. The Finnish corporate sector, on aggregate, is
a net lender in national account terms.
Assessment of the financial sector 
Risks to financial stability are likely
to be limited as the Finnish financial sector appears strong. In November 2014, the last month for which data is available,
credit to households grew 2 % year-on-year (Graph 2.3.2). The growth in mortgage loans
remained moderate (1.6 %), while consumer credit increased rather well,
by 4.4 % year-on-year. Loans to corporations increased by 4.6 %
year-on-year in November. This is a minor slowdown compared to earlier in 2014
when growth ranged from 5-6 %. The ratio of corporate credit to GDP
remained rather constant, at about 35 %. Corporate sector deleveraging in
Finland has been relatively small and brief, happening only in 2009. Finally,
lending to government increased by 11.1 % in November 2014. Bank credit
to the government has been growing fast since 2009, increasing its share in GDP
from 3 % to 6 %.Thus, credit continued to expand despite the
recessionary environment. Low interest rates have been among the key factors
supporting this trend. The credit expansion suggests that both private and
public borrowers benefit from the ample liquidity in the market and have no
significant problems in accessing finance. Surveys provide similar indications.
 Graph 2.3.2:   Lending to households (HH) and non-financial corporations (NFC) in Finland 
 Source: European Central Bank 
In 2014, the 7.7 % of GDP net
financing of Finnish banks to the economy was the highest in the euro area. In nominal terms, it amounted to EUR 15.7 billion, including
EUR 2.8 billion for the government, EUR 8.2 billion for the private
non-financial sector and EUR 4.7 billion for other assets (Table 2.3.1). In addition, Finnish banks were net
lenders to other euro-area banks (EUR 3.9 billion) and non-euro area
economies (EUR 1.1 billion). These claims were financed by the increased issuance
of capital and debt on financial markets (EUR 8.8 billion) and a further
reduction of cash reserves deposited at the Eurosystem (EUR 11.7 billion)([29]). Regarding the latter, bank deposits at the central bank fell from
their peak of EUR 80 billion in 2012 to EUR 10 billion by 2014. This
constitutes a normalisation as the 2012 figure was inflated due to the inflow
of liquidity to Finland in 2011-12, driven by the safe-haven effect during the
euro-area sovereign-debt crisis.([30])
 Table 2.3.1:     Financial flows involving banking sector, 1-10/2014 - Finland 
 Source: European Central Bank 
Financial soundness indicators remain at
comfortable levels. The supervisory data showed a
certain increase in loan impairments during 2014, breaking a long-standing
downward trend.([31]) Nevertheless,
the average non-performing loan ratio below 1 % is among the lowest in
the EU (Table 2.3.2). Capital adequacy ratios also
deteriorated slightly in the first half of 2014, but recovered again in the
third quarter. Profitability indicators for the sector are close to European
averages. The European Central Bank’s October 2014 Comprehensive Assessment
confirmed that the three largest banks, which account for more than three
quarters of the market by assets, have sufficient capital buffers to withstand
tough conditions. Under the stress test's adverse scenario, the average market
capital-adequacy ratio would decrease to a Common Equity Tier 1 ratio of
11.6 % by 2016.([32])
 Table 2.3.2:     MFI Soundness Indicators - Finland 
 (1) 2014 refers to data up to 2014-Q2 Source: European Central Bank 
Household debt and the housing market
The main driver of the rising household
debt was the rapid growth in mortgage loans before the financial crisis, but
recently the growth in debt has decelerated markedly. Household debt has reached 120 % of household (net) disposable
income. The substantial increase in household debt occurred between 2002 and
2009 when the ratio of loans to net disposable income rose from 70 % to
110 %. The average proportion of mortgage debt in total household debt
over the past 15 years was about 89 %. As the ratio has remained
relatively stable, other debt components also increased. Reflecting the
renovation needs of existing urban dwellings, related loans were mostly taken
out by housing associations. But ultimately, these have to be paid back by
households. They are therefore included under the headline household sector
long-term loans in Financial accounts.([33]) The latter have continued to grow rapidly compared with the growth
in mortgage loans: Currently, loans taken by housing associations are growing
by more than 10 % year-on-year while mortgage loans are increasing by
slightly below 2 %. 
 Graph 2.3.3:   Household sector loans by type of loan 
 (1) Type F4 Loans include short-term and long-term loans (F42). Type F42 includes housing associations' loans, for which households are responsible. Type F429 loans include other long-term loans including households' mortgages. Source: Statistics Finland, European Commission 
The interplay of increasing disposable
income and real house prices, lower interest rates, and longer mortgage
maturities, explains the rapid growth in mortgage debt in 2002-10. In Finland, the majority of mortgages are tied to variable interest
rates. That is why almost without exceptions in the 2000s, average interest
rates for mortgages have been below the euro area average and were gradually
decreasing. The increase in reference rates just before the financial crisis
slowed down the growth in mortgage debt to some extent. According to surveys,([34]) the maturity of new mortgages increased from an average of 11
years in 1998, to around 16 years in 2005 and to 17 years in 2014.
 Graph 2.3.4:   Average mortgage rates - selected countries 
 Source: European Central Bank 
Finally, nominal and real house prices
continued the rapid increase that started in the mid-1990s until the financial
crisis in 2008. After the crisis and subsequent
recovery with a house price rally in 2010, the increase in nominal house prices
has gradually turned into a slight decline observed very recently (Graph 2.3.6). Real house prices have declined
since latter half of 2011 in line with a weak economic situation. Despite the
fall in house prices during the crisis in the early 1990s, house prices in
Finland over the 1990-2014 period, rose altogether by 80 %. In the
capital region, nominal house prices have roughly doubled over the same period
(Graph 2.3.5). This reflects the inland migration
towards metropolitan Helsinki and other urban regions. However, the ratio of
nominal house prices to household disposable income remained below the 25-year
average between 1994 and 2009. This is explained by the fact that households
enjoyed a period of good income growth during the robust economic times as both
employment and wages grew.
 Graph 2.3.5:   Nominal house prices by region, 1990=100 — Finland 
 (1) The capital region includes Helsinki, Espoo, Kauniainen, Vantaa. Source: Statistics Finland 
 
 Graph 2.3.6:   Growth of house prices and loans by monetary financial institutions for house purchases — Finland 
 Source: Statistics Finland, Bank of Finland, European Commission 
The ability of households to service
their debts is currently assessed as adequate.
Although household debt has increased, interest expenditure, as a share of
disposable income, has decreased significantly from the peak reached in 2008.
By the end of 2013, interest expenditure amounted to less than 2 % of
disposable income. This is lower than in 2004 when the debt level was 40
percentage points lower compared with the net disposable income. As a risk
controlling measure, many Finns prefer fixing their monthly loan payments. A
rise in interest rates often translates into a lengthening of the loan maturity
rather than an increase in the monthly payments. In 2012, 46 % of
households taking mortgages opted for this solution.([35])
 Graph 2.3.7:   Leverage, households — Finland 
 Source: European Commission 
Household assets include financial and
non-financial assets. Household assets included, at
the end of 2013, EUR 85bn in the form of currency and deposits, EUR 97bn in
shares, and receivables worth EUR 46bn in insurance and pension plans.
Non-financial assets amounted to EUR 413bn, most of this being comprised of
dwellings and land. Altogether, household financial assets thus accounted for
112 % of GDP compared with debt of 69 % of GDP. Household leverage
has increased, although the increase in financial assets has held back the
increase in the debt-to-financial assets ratio, which currently stands at
52 %.
 Graph 2.3.8:   Household debt — Finland 
 Source: European Commission 
Current house prices are somewhat above
the long-term average. House prices in Finland,
when seen in relation to the private consumption deflator, disposable income
per capita or the index of wages and salaries show that the valuation of
housing is currently somewhat above the 25-year average. House price
developments have decoupled especially from developments in the private consumption
deflator, as currently the house-prices-to-private-consumption-deflator ratio
is more than twice as high as ratios calculated with respect to disposable
income per capita or the index of wages and salaries. All these indicators are,
however, currently converging towards their long-term levels, but no sharp
adjustment is expected.
 Graph 2.3.9:   Housing market valuation — Finland 
 Source: Statistics Finland, European Commission 
Prior to the financial crisis, a rather
rapid increase in inflation-adjusted house prices was observed in several
countries, including Finland. However, real house
prices have remained relatively stable in Finland over recent years. Earlier
analysis suggests that, generally, the current valuation of housing in Finland
has responded to supply and demand factors in the market.([36]) On the demand side, inland migration towards urban areas and
net-immigration into Finland should support the demand for housing. In the capital
region, especially in Helsinki where prices appear more dynamic than in the
rest of the country, homebuyers prefer central locations. Because an increase
in supply of new housing is nearly impossible in these areas, house prices are
pushed higher.
 Graph 2.3.10: Real house prices — selected countries 
 Source: European Commission 
Regional data suggests that higher
housing valuations seem to be linked to lower residential investment. In many Finnish regions, the average ratio for residential
investment per capita between 2008 and 2011 was below the average in 2004-07.
The regions that witnessed the largest fall in the ratio also witnessed the
largest increase in the overvaluation of housing measured as the ratio of
regional house price to disposable income. Residential investment adjusted for
population fell especially in the greater Helsinki region, where overvaluation
is one of the highest. On the other hand, regions that have suffered from
downsizing of forest or electronics industries have seen their housing
valuations fall.
 Graph 2.3.11: Falling residential investment associated with higher housing valuations, regional data 
 Source: Statistics Finland, European Commission 
The ratio of house prices to building
costs also indicates some shortfall in residential investment. The observed increase in the ratio should imply more profitable
residential building projects for producers (Graph 2.3.12), thereby increasing residential
investment. However, the ratio of residential investment to GDP  has remained rather
stable at 5-7 % of GDP in recent years.
 Graph 2.3.12: Incentives to invest fail to increase residential investment 
 Source: Statistics Finland, European Commission 
Debt of non-financial corporations 
At the end of 2013, the debt of
non-financial corporations totalled around 120 % of GDP. While it had increased during the crisis, the ratio remained
relatively stable over recent years. The debt-to-financial assets ratio
has remained stable. The structure of non-financial corporation debt is
diversified. Around 40 % of debt stems from lending by Finnish monetary
financial institutions In terms of the origin, 25 % of the debt stems
from the issuance of long-term bonds. Other elements include lending from the
rest of the world, lending from Finnish non-banks, lending from
employment-related pension-insurance institutions, lending from the public
sector and short-term bonds (a very small share).
Corporate indebtedness does not derive
from specific legal norms giving preference to debt financing over other forms
of financing. Over recent years, low interest rates
have facilitated access to, and use of, credit. Finnish companies access credit
for investment, and for working capital purposes. Loans from Finnish monetary
financial institutions loans have mainly (49.4 %) gone to finance real
estate activities (including loans to housing corporations). A total of
11.2 % of the loans are for manufacturing companies, and 5.2 % for
the retail sector. However, bond debt is mainly issued by large manufacturing
companies.
 Graph 2.3.13: Leverage, non-financial corporations — Finland 
 Source: European Commission 
Finnish SMEs have relatively good access
to bank lending, although about 40 % of firms making use of external
financing have noticed that loan conditions have tightened. The continuing uncertainty about export prospects has kept
investments low and external funding has mostly covered working capital needs.
To promote the growth of innovative firms, the government has considerably
increased the availability of venture capital, having invested EUR 105 million
in 2014 and planning to invest the same amount in 2015, with a further EUR 55
million both in 2016 and 2017 through Finnish Industry Investment, Finnvera and
Tekes. The target is to leverage more than EUR 1 billion of total venture
capital investment. Increased venture capital investment requires better exit
opportunities for investors. This has been identified as an area requiring
improvement, including through changes in the tax treatment of listed firms.
Furthermore, there have been increases in tax incentives for business angel
investments and an industry-led initiative to standardise the terms of bond
issuance. Furthermore, a corporate bond marketplace was introduced in 2014.
Firm growth is also promoted through a programme of ten accelerators comprising
about 100 portfolio firms in total.
 Graph 2.3.14: Balance sheet, non-financial corporations - Finland 
 (1) A stands for assets, L stands for liabilities Source: European Commission 
Deleveraging
In Finland, the household deleveraging
process has not taken hold so far. The debt of
non-financial corporations appears to have peaked in 2010, but household debt
is still on an increasing trend. Since then, some de-leveraging has occurred,
although the debt level has not declined significantly. Credit flows were
positive over the 2008-2013 period for non-financial corporations and for
households and real GDP decreased. Inflation has been rather modest. Thus,
credit flows and real GDP growth have increased the debt-to-GDP ratio while
nominal GDP growth has reduced it through the denominator effect. 
 Graph 2.3.15: Breakdown of year-on-year changes in debt-to-GDP ratio, households (ESA 2010) — Finland 
 Source: European Commission 
Potential deleveraging pressures are
likely to be limited in Finland. Household deleveraging needs are not found to
be significantly big while non-financial corporations have recently recorded a
slight decline in their indebtedness. Especially if
seen in the light of its steady increase over the 2000s, the rather high level
of indebtedness of households could point to some potential deleveraging needs
for Finnish households. However, the strength of the Finnish financial sector
implies that the private sector faces low deleveraging pressures from the
credit supply side. In addition, micro-level data on the distribution of
household debt in Finland does not point to concentration on the more fragile
parts of the population. Similarly, corporate indebtedness is not concentrated
in low-profit, or low-capitalised firms (Table 2.3.3). This can be seen as a mitigating
factor for what is on the surface the relatively high level of overall
indebtedness. Thus, if any deleveraging is to be expected, it will likely be
gradual, driven by the nominal debt stock increasing at a lower rate than
nominal GDP growth rather than negative net credit flows, implying no
substantial drag on aggregate demand and lower stress for asset markets.
However, should overall economic conditions worsen (including, for instance,
through adverse shocks to the financial sector or to the housing market)
estimated excess indebtedness of households or firms could materialise in
negative credit flows and a nominal contraction of balance sheets. These risks,
however, are assessed as contained since the financial sector is healthy and
mortgage interest rates are likely to remain low. 
 Graph 2.3.16: Breakdown of year-on-year changes in debt-to-GDP ratio, non-financial corporations (ESA 2010) — Finland 
 Source: European Commission 
 
 Table 2.3.3:     Non-financial corporations debt to profits and debt to capital -distribution 
 (1) The results on the distribution of corporate debt are based on a firm-level dataset from the Bureau Van Dijk's Orbis database. The data refer to the fiscal year 2013, which on the date of the download (December 2014) were available in Orbis for a large majority of firms, but not for all. Subsidiaries of resident companies with consolidated financials were excluded to avoid double-counting. Firms operating in finance and insurance, public administration, health and social services, and education, were excluded. Debt is defined as the sum of loans and non-current liabilities. Capital employed is the sum of debt and equity. Earnings before interest, taxes, depreciation and amortization (EBITDA) are directly taken from the database. The thresholds for debt/capital employed (70 % and 90 %) and the debt/EBITDA (6x and 12x) are approximately equal to the 75th and 90th percentile across the pooled sample of firms from fifteen EU countries (which include vulnerable and core countries). Reported figures represent the share of debt held by firms in a given solvency bucket, as a percentage of the total amount of debt. Source: Orbis, European Commission 
An important factor determining
deleveraging among households is the distribution of debt across households. Aggregate measures of debt at the level of the sector could hide
deleveraging risks if debt is more concentrated among households with few
assets and low incomes. Another important element is the level of
debt-servicing costs relative to incomes, which will drive the short-term sustainability
of debt. In Finland, 45 % of households did not have any debt at all in
2012. One in four households have a debt burden that does not exceed
100 % of their annual income and 10 % are in the range between
100 % and 200 %. About 15 % of households have debt between
200 % and 400 % and only a small number of households have higher
debt. The low non-performing loans ratio suggests that the banking sector has
been successful in allocating loans to customers who have been able to service
their debt. In the current environment of low interest-rate, even households
with debt at 500 % of their disposable income use less than 10 % of
their disposable income for interest payments.
Overall, the analysis in this section
indicates that risks associated with the debt burden are limited. Since the crisis, households have faced a relatively quick increase
in their debt burden. The debt burden has broadly stabilised at a level that is
slightly above the euro-area average, but is lower than in other Nordic countries.
Household debt mainly takes the form of mortgage debt and tends to be linked to
variable interest rates. Recent declines in interest rates have reduced the
burden of servicing the debt, but also reduced the incentives to deleverage.
Housing market indicators do not raise any concern for strong over-valuation in
this market. Corporate sector debt has also stabilised. Lending decisions by
banks appear to be prudent, as demonstrated by thy low amount of non-performing
loans. Strong capitalisation of banks implies that there is no pressure to
deleverage from the credit supply side. 
Taxation
Finland’s general level of taxation is
high compared with other euro area countries. The
tax burden is above 44 % of GDP and has been growing steadily since 2008.
However, in line with its general fiscal plan for 2015–18 and as part of its
fiscal consolidation efforts, the government introduced a number of amendments
to the tax system that took effect in early 2015. Besides a positive revenue
impact, some of the measures are expected to contribute to a tax shift from
labour towards other tax bases that are considered to be less detrimental to
growth.
The amendments that took effect in 2015
increase the progressiveness of the tax system and shift taxation towards
indirect taxes. The most significant changes relate
to excise duties and other indirect taxes. The changes to personal income tax
lower the tax burden on low- and medium-level incomes and thus increase the
progressive nature of the tax system, both for earned and capital income. These
changes will lead to a net loss of tax revenue of about 270 million euros
(Ministry of Finance estimate). However, government revenues are expected to
increase by approximately 500 million euros thanks the increases in indirect
taxes. Thus, the net effect is the increase of tax revenues. 
Finland, like several other EU member
states, has room for broadening the value-added tax (VAT) base. As a result of lowering the reduced rate applicable (notably) to
food products in late 2009, the VAT policy gap, i.e. the revenue forgone due to
application of reduced rates or exemptions (instead of the standard rate),
widened. A more limited use of reduced VAT rates and exemptions would increase
the efficiency of the VAT system and provide a potential source of additional
government revenue.
The recent changes in property taxation
and the ongoing reform of mortgage interest deductibility constitute a tax
shift towards property taxation. Recurrent property
taxation is considered to be among the most growth-friendly and least
distortive taxes and in this area Finnish tax revenues are below the EU
average. Hence, the recent measures to increase the revenue-raising capacity of
municipalities by raising the tax rate margins for recurrent taxes on real
estate as of 2015 go in the right direction. In addition, the deductible part
of mortgage interest is being reduced from 85 % in 2012 to 50 % by
2018.
Finland has raised environmental taxes
and lowered environmentally harmful subsidies. The
most significant changes to indirect taxation are the increases in motor
vehicle taxation and energy taxation (increase of excise duties on fuels used
in traffic and heating) and electricity taxation (rate increase) and the
removal of tax subsidies to the mining industry. A further review of the
measures in this field could, however, help Finland to better meet its
environmental targets and improve its fiscal position by relying more on taxes
that are less detrimental to growth. According to a study published by the
Ministry of Environment (and prepared in co-operation with the Ministry of
Finance) environmentally-harmful subsidies such as tax exemptions and reduced
rates on specific industrial activities and fuels amounted to 3 billion euros
in 2014.
Debt sustainability
Finland’s general government gross debt
nearly reached the 60 % limit in 2014 and it is expected to exceed it in
2015. While in the short term there are no
debt-sustainability challenges, in the long-term challenges arise from an
ageing population.
 Graph 3.1.1:   General government total revenue, total expenditure and net-lending /net-borrowing,  % of GDP , Finland 
 (1) All series are 4 quarter moving sums Source: Statistics Finland, European Commission 
The budgetary impact of population
ageing poses a challenge to long-term fiscal sustainability in Finland, in
particular in the area of pensions and long-term care policies. In 2014, Finland was recommended to ensure effective implementation
of the ongoing reforms of the social and healthcare services, in order to
increase the cost-effectiveness in the provision of public services. The
analysis in this report leads to the conclusion that Finland has made some
progress on measures taken in response to this recommendation. 
Finland has recognised the
sustainability gap and produced a structural policy programme aimed at closing
it. The policy programme aims at increasing the
labour input and potential growth of the economy, but also addresses areas such
as long-term care and pension reform (discussed in greater detail in the
following sections).
The debt ratio has been increasing due
to the primary deficit but also due to low real GDP growth. Finland’s gross public debt had reached 56 % of GDP in 2013.
The debt is on an increasing trend and is projected to reach 62.6 % in
2016. Part of the debt has been accumulated due to Finland’s participation in
support measures to safeguard financial stability in the rescue operations for
other euro area countries. 
Government debt is likely to continue to
increase beyond 2016. According to the baseline
scenario (relying on Commission forecasts, long-run convergence assumptions —
agreed by the Economic Policy Committee — of underlying macroeconomic
variables (real interest rate, real GDP growth, inflation) and the assumption
of constant fiscal policy beyond the forecast horizon), the debt level would be
relatively stable until 2019-20 and continue to increase thereafter. The
increase would be driven by the costs of ageing. The assessment does not yet
take account of the agreed — but not legislated — pension reform that would
lower ageing-related costs.
Debt refinancing risks are currently
low. Finland has retained the highest credit rating
from two of the three main credit rating agencies. Debt is mainly long–term and
annual refinancing needs are low. Finland does not face contingent liabilities
related to the banking sector. More than 80 % of its debt is held by
non-residents, but the debt is almost exclusively euro-denominated (or in the
case of foreign-currency loans, swaps are used to eliminate rate risk). In
addition, it must be taken into account that the earnings-related pension
system included in the general government sector is partially pre-funded and is
in surplus. The surplus stood at 1.9 % of GDP in 2013 and is estimated by
the national authorities at 1.5 % for 2014. The surplus is included in
the general government balance, but is not used to pay off general government
gross debt. These funds show up as a net accumulation of assets in the
stock-flow adjustment. Therefore, Finland’s general government net financial
assets position is forecast to amount to 56.5 % of GDP in 2014.([37]) Among the OECD countries, it is one of the highest positive net
financial asset positions.
Fiscal framework
Finland’s fiscal framework should guide
fiscal policy in accordance with agreed principles.
Finland has enacted in national law the structural-budget-balance rule mandated
by the Fiscal Compact([38]) and
enshrined specific implementing provisions in secondary legislation. Finland’s
fiscal framework is tied to multiannual expenditure ceilings. The framework is
linked to parliamentary terms, and experience with the framework suggests that
the government abides by the rules. Every year, the government sets limits on
central government spending for the remaining years of its term, defining the
multiannual financial framework. Successive yearly decisions on annual ceilings
are taken on the basis of this framework. In February 2014, the fiscal
framework was strengthened by a provision allowing central government also to
plan and monitor the expenditure of local authorities and social security funds
sub-sectors; it is going to be implemented for the first time in 2015.
Implementation details have been published by the ministry.([39])
Decisions on spending limits are taken
in late March each year, setting annual limits on government expenditure for
the subsequent four years. However, neither
nominal-balanced budget requirements nor limits on annual deficits are present
in the legislation. This policy aims at controlling government expenditure
while maintaining enough flexibility to respond to changes in the economic
environment. The framework includes built-in automatic stabilisers, as some
expenditure falls outside the scope of the limits. However, there seems to be
limited flexibility to react to challenges arising during the current year. If
a growth forecast is revised significantly downwards during the year, as
happened in 2013 and 2014, there is no process to adjust the expenditure limits
accordingly.
The 2015 budget will test the operation
of the structural-balance rule. According to the
government forecast underlying the Draft Budgetary Plan for 2015, Finland would
move away from its 0.5 % structural-deficit target. The government
decided that adjustment measures are necessary. However, the adjustment did not
alter its 2015 budget but rather strengthened implementation of its structural
policy programme.
The National Audit Office is entrusted
with the responsibilities of the Fiscal Council while the Ministry of Finance
remains responsible for forecasting. The National
Audit Office monitors the implementation of fiscal rules and in particular
compliance with the medium-term budgetary objective. However, it does not
assess the macroeconomic forecasts underlying the stability programme or the
draft annual budget. The latter are prepared by the Department of Economics
within the Ministry of Finance. In this respect, on 27 January 2015 the
parliament adopted a law that aims to ensure the independence of forecasting
tasks in the Ministry of Finance.
Labour market
The situation of the Finnish economy and
labour market deteriorated during the last year and there are important
challenges ahead. The Finnish labour market was
characterised by solid indicators before the crisis, but currently the
long-term effects of the crisis and the structural changes to the economy are
being felt quite severely. Employment figures are deteriorating, and
particularly long-term unemployment is rising. In the longer term, pressing
demographic challenges will need to be addressed. The unemployment rate
increased by 0.5 percentage points in 2014 compared with 2013 (from 8.2 %
to 8.7 %), the biggest increase in the EU, and the growth in unemployment
was particularly strong among the young and the older workers.([40]) The unemployment rate is still below the EU average of
10.3 %, but above that of Nordic peers Denmark (6.5 %) and Sweden
(8.0 %).
 Graph 3.2.1:   Labour market indicators 
 Source: European Commission 
Use of full labour force potential 
There are pressing demographic
challenges in Finland that impact on labour supply.
Nearly 20 % of all Finns are 65 years or over, the eighth- highest
proportion in the EU and this could rise to over 25 % by 2030([41]). The number of people leaving the labour force each year exceeds
the number of people entering it. In view of the ageing population and the
resulting shrinking working age population, it is important to bring the full
labour force potential to the labour market. To maintain the supply of labour,
it is important to improve entry into the labour market and prevent the early
exit of older workers and those on disability pensions. Furthermore, increasing
job opportunities of those with partial work incapacity, and to facilitate the
combination of part-time work and benefits would be beneficial. Reducing
unemployment, in particular youth and long-term unemployment, remains a key
challenge for Finland. 
Ensuring longer working lives
The inclusion of older workers in the
labour market is a cause for concern. Increasing
the participation of this group in the labour force is crucial in view of the
fiscal sustainability gap and the planned increase of the statutory retirement
age. The decreased labour supply resulting from the demographic change of an
ageing population, coupled with the expenditure pressures of publicly financed
age-related items (such as health care) places considerable pressure on the tax
base and constrains production in the economy. Despite some positive trends
regarding the labour market participation of older workers, there is still room
for improvement. The 58.5 % employment rate of for 55-64 years old is
above the EU average but lower than in comparable countries like Denmark (61.7 %)
or Sweden (73.6 %). The level of 44 % for those aged 60-64 years in
2013 is also a long way from the best performers in the EU (Sweden
65.4 %, Estonia 50.6 %). One of the possible explanations for the
Nordic differences in old-age working is the lower prevalence of part-time work
in Finland.([42]) Early exit
from the labour market occurs mainly through disability or through the
‘unemployment tunnel’ — i.e. extended unemployment benefits available for the
elderly unemployed. Finland has set itself the target of raising the effective
retirement age to at least 62.4 years by 2025. There has been some progress in
this regard as the retirement age has risen from 60.9 in 2013 to 61.2 in 2014.
The positive trend should continue with the pension reform.
The Finnish workforce (in particular
older and low-skilled workers) could benefit from targeted measures designed to
enable them to continue participating actively in the labour market for longer. Moreover, it would be beneficial for human resource policies in
traditional industries to include a particular focus on older workers, notably
in order to prevent skill shortages emerging in areas where there are new and
often evolving production processes. Finland  also faces the challenge of skills
mismatches, a consequence of the ongoing structural change taking place in the
economy. The skills offered by workers leaving more traditional, often
declining sectors do not correspond to those required in the sectors that are
currently expanding, which tend to be more technologically intensive.
There have been concerns regarding the
quality of working life in Finland, especially among the elderly. Vocational training and measures aimed at improving health, safety
and the quality of the working life seem to be the main areas to be developed.
Reduced work ability is among the main reasons on which around 25 000
people retire annually on a disability pension([43]). However, there has been some improvement in this regard as in
2014 there were 18 800 people retiring on disability pension. Social partners
— together with the competent ministries, the Finnish social security
institution and the Centre for Pensions — have produced a report on the
employability of people with partial work ability.([44]) This initiative goes in the right direction but it is important to
accompany it with implementing measures in workplaces. A recent study published
by the Finnish Centre for Pensions concludes that the working conditions have a
high impact on the willingness of older workers to remain in employment.([45]). New initiatives in these matters have been on hold in 2014 as the
focus has been on the pension reform, but further efforts would be beneficial.
Participation of older workers in lifelong learning is significantly lower than
for the overall population. The overall lifelong learning participation rate is
the third highest in the EU (24.9 % in 2013 while the EU average was
10.5 %). Participation rates for older and low-skilled adults were also
above the EU average, but considerably lower than that of the general adult
population in Finland: the estimated participation rate for those aged 55-64
was 13.5 % (EU average 5.7 %), while for the low-skilled it was
just 10.7 %.
Pension reform 
The social partners in Finland reached
an agreement in September 2014 on a pension reform that should take effect in
2017. The agreement will be legislated once the
details have been established. Currently workers can retire at the age of 63
but are allowed to continue working until the age of 68. Under the agreement,
the retirement age brackets will be raised gradually for those born in 1955 or
later, until the lowest retirement age is 65. The retirement age will be linked
to life expectancy as of 2027 so that the relationship of time in work and on
pension remains at the level of 2025. The development will be monitored every
five years in a tripartite setting, headed by the Ministry of Social Affairs
and Health. In long and arduous work (38 years of work with work pensions paid,
where work is deemed arduous) there will be an opportunity to retire at 63.
Based on the progress made with the
pension reform, it can be concluded that Finland has made some progress towards
increasing the effective retirement age. Although
the legislative text regarding the reform is not yet finalised, an agreement on
most issues has been reached and the Finnish Centre for Pensions has prepared
some projections regarding the sustainability and adequacy of the new pension
system. The first assessment of both of these aspects is positive. It will,
however depend on whether raising the minimum pensionable age is underpinned by
effective measures to enable people to really stay longer at work. Similarly,
the Prime Minister’s Office has commissioned a report on the quantitative
results of the reform([46]) that
confirms that the objectives of the reform can be reached. It is important to
target the planned possibility to retire at 63 for those in long and arduous
work in a way that avoids facilitating unjustified early retirement.
Furthermore, the possibility for the elderly unemployed to leave the labour
market through the unemployment tunnel remains, although its significance as an
exit pathway from the labour market has already reduced over the last decade.
Under the agreement on pension reform, there is the possibility to raise the
age limit to retire through the unemployment tunnel by one year from 61 to 62.
Combatting unemployment and implementing
the Youth Guarantee 
The cyclical downturn in the economy
impairs first job prospects. Youth unemployment has
remained stable at 20.5 %. A major factor blocking improvement is the
unfavourable economic situation, which raises the threshold for labour market
entry. It should be noted however, that the majority of young people
(approximately 61 %) spend less than two months in unemployment([47]) (the average duration of youth unemployment is 13 weeks) and that
the youth unemployment figure also includes students looking for work,
therefore approximately 60 % of young unemployed are at the same time
students. The rate of young people not in education, employment or training
(NEET) was 9.3 % in 2013.
Nonetheless, there has been substantial
progress with regard to improving the long-term labour market prospects of the
young unemployed or inactive through the Youth Guarantee. The Finnish Youth Guarantee Implementation Plan has contributed to
limiting youth unemployment, with 67.8 % of guarantee beneficiaries
starting a job, a traineeship, apprenticeship or further education within four
months of registering with the Finnish public employment service (after six
months this increased to 89.6 % of guarantee beneficiaries). Maintaining
these levels could be challenging with the growing demand for Youth Guarantee
services combined with budget cuts to public employment service. Implementation
of the educational guarantee part is considered to have been more successful
than that of other services and measures. However, making efforts to meet the
requirements of the programme also in terms of social, health and
rehabilitation services would be beneficial. Its impact could be increased by
taking better account of young people not in education, employment, or training
and targeting specific subgroups combined with stronger attention to vocational
education and training apprenticeships. 
Integrating vulnerable groups in the
labour market
While Finland has a high overall
employment rate, it is relatively low for low-skilled people. In 2013 the employment rate of the low-skilled was 52.2 % (in
the 20-64 age group), lower than in Finland’s Nordic peers. The interplay of
the tax and benefit system creates inactivity traps, as social and housing
benefits are lost when taking up work, leaving the net gain minimal (Graph
4.2.1). There have been attempts to remedy this issue. Since the beginning of
2014 it has been possible to receive employment-related earnings for up to 300
euros per month without any impact on the unemployment benefit, and this has
already shown some promising results. Starting from 2015, the housing allowance
will include a protected part of 300 euros, which will not be deducted when the
person receiving assistance receives revenue from work. This measure is
expected to further alleviate the problem to some extent although continued
attention to this issue would be beneficial.
 Graph 3.2.2:   Tax rate for an individual (single, no children) to take up work at 67 % of the average wage 
 Source: European Commission 
People with partial work capacity could
also be better integrated into the labour market.
Many of those who have retired on disability pensions would like to work, at
least part-time, but incentive issues affect their decision. There could be
more opportunities for employees to negotiate their working hours and to
combine earnings with benefits.([48]) There are some promising initiatives to integrate these groups,
such as Working Life 2020 – a project coordinated by the Ministry of Employment
and the Economy, but so far their impact on the overall labour market is
limited. Adjustments in workplaces would also be beneficial. For instance,
there are examples of support schemes from Sweden and Denmark where the focus
has been on recognising the skills and abilities of people with disabilities
and arranging their tasks accordingly.([49])
Long-term, structural and regional
unemployment 
Although long-term unemployment is not
as severe an issue as in many other countries, it is on an increasing trend. The number of people who have been unemployed for over a year
continues to increase, as does the number of people who have been unemployed
for over two years. The rate of long-term unemployed in total unemployment in
2013 was 20.7 %, still substantially below the EU average of
47.4 %. Many people have given up looking for work ([50]) and are likely to find it difficult to get back to work when the
economy starts improving, since transition rates from long-term unemployment to
employment in Finland are below the EU average.([51]) This suggests that the capacity of the economy to adjust to the
ongoing restructuring of traditional industries is limited. Targeted activation
measures would be beneficial([52]).
While the possibilities for companies to
hire workers improved in the last year, the average time to fill vacancies has
increased. This indicates that despite the higher
number of jobseekers, it is increasingly difficult for employers to find
suitable candidates. Compared with 2012, the numbers of both vacancies and
jobseekers have increased([53]). This
indicates that the matching between jobs and jobseekers is deteriorating, which
is a cause for concern as it increases the risk of structural unemployment. The
mismatch in the labour market is probably due to the structural change in the
Finnish economy. New jobs are being created in sectors and areas different from
those where jobs were lost. The increase in vacancies was highest in office
work, service and sales.([54]) The
mismatches in the labour market may slow down the increase in employment rates
that can normally be expected following improvements in economic growth. There
are considerable regional differences in unemployment rates (6.7 % in
Uusimaa and 12.5 % in Northern Karelia and the high house prices and
rents in the Uusimaa area are likely to act as a curb on the mobility of
workers.([55])
New initiatives to promote employment
New measures have been introduced in
order to stimulate employment. These relate to a
better organisation of wage subsidies and public employment services, with a
particular focus on older workers and workers with disabilities, and the
long-term unemployed. The Finnish wage-subsidy system has been reformed, with a
particular focus on the elderly and people with disabilities, and a clearer
system for all potential recipients of these subsidies. The wage subsidies for
the over-60s who have been unemployed for over 12 months will be introduced on
a permanent basis and 50 % of the salary costs of those with disabilities
are planned to be covered by the subsidies. Regarding the organisation of
public employment services, the government has presented a legislative proposal
to parliament for a multi-professional joint service for the long-term
unemployed. The public employment services would work together with municipal
authorities and the social security institution to ensure a tailor-made
approach and a more intensive follow-up of the long-term unemployed. Changes to
the subsidies and public employment services have been effective from the
beginning of 2015 and the changes to the multi-professional services will be
implemented during the year. It is too early to assess the full effects of the
new wage subsidies, but they could be a step in the right direction to
stimulate employment. The changes to public employment services seem promising,
as long as the services provided are comprehensive. Therefore it can be
concluded that some progress has been made regarding the employability of older
workers and to improve the labour market prospects of the long-term unemployed.
Gender, health and poverty 
The Finnish labour market is
characterised by a relatively high gender pay gap
(19.4 % in 2012 compared with an EU-average of 16.4 %), while
employment rates for women (71.9 % in 2013) are well above the EU average
and remain high also in full-time equivalents (67.3 % in 2013). The main
reason for the high gender pay gap is that men and women tend to work in
different sectors and occupations. Within the EU these gender differences on
the labour market are the fourth largest in Finland after Estonia, Slovakia and
Latvia. Furthermore, Finnish women make use of long family leaves, and recent
plans to encourage fathers to take up longer periods of family leave have been
dropped. The high gender pay gap and career breaks related to childcare
responsibilities have a negative impact on retirement incomes of older women.
The at-risk of poverty rate for women aged 65+ in 2012 was 24.4 %, twice
that of older men (12.7 %). The rates are higher than the average in the
EU-28 for women (21.7 %) and lower than the average for men
(16.3 %). The average occupational pension for women now equals only
65 % of that of men (up from 55 % in 2000), and the retirement of
future generations of women with longer working careers is projected to have
only a limited effect. According to the most recent projections by the Finnish
Centre for Pensions, occupational pensions for women will equal 75 % of
pensions for men in 2040.
There are deep-rooted socioeconomic
inequalities when it comes to disability, health and life expectancy that also
affect labour market participation. The share of
Finns in the bottom-income quintile reporting severe limitations in daily
activities is four times higher than in the top quintile, while in the EU on
average it is less than 2 times higher.([56]) Recently, health inequalities have even grown. This means that
people are not in the same position to prolong their careers, which can deepen
inequalities in old age. 
Education and skills
The level of public spending on
education is still high (6.4 % of GDP in 2012),([57]) which has enabled Finland to maintain its high performing
education system, but significant savings measures were introduced by the
Finnish government. The
structural policy programme adopted in late 2013 reduces government expenditure
on education by a significant amount (approximately 280 million euros, about
5 % of the education budget) over the period 2014-17.([58]) The tighter budgetary restrictions might make it necessary to
reorganise the upper-secondary school network or the provision of pre-school
education (or both) by local authorities. There is a risk that this will have
an impact on the quality of educational outcomes.
Reducing early school leaving 
The rate of early school-leaving is
stable and the level of basic skills remains high but new challenges are
emerging, especially for young migrants. Finland is
performing better than the EU average in tackling early school-leaving (with a
rate of 9.3 % of early school-leavers compared with an EU-average of
12.0 % in 2013), but whereas the rate has remained fairly stable over the
last decade, the EU-average has improved. The early school-leaving rate tends
to be significantly higher among migrants (14.9 % in 2012) and boys.([59]) Finland’s performance in the 2012 OECD Programme for International
Student Assessment (PISA) survey measuring the skills of young adults (15 year
olds) deteriorated significantly in all three areas as compared with 2009, in
particular in numeracy. The results for students with
migrant backgrounds were far lower than for those of Finnish origin. Nonetheless, Finland maintained its position as one of the EU’s top
performers in education, in particular in science, and is still among the top
five countries worldwide.
New measures are being put into place in
order to reduce early school-leaving and improve basic skills. The Finnish authorities decided in 2013 to introduce a mandatory
pre-school year that children would start at age six, but it remains to be seen
whether this measure will help in tackling early school-leaving. Finland also
introduced a preparatory education programme for general upper-secondary
education that is aimed for migrants. Finland still succeeds in combining high
levels of performance with equity in education. Early detection and
intervention mechanisms allow educators to identify students who are struggling
and to offer them the necessary support early on. 
Improving vocational education and higher
education
There is high participation in
vocational education and training, but the number of apprenticeships remains
fairly low. The participation of upper-secondary students
in vocational education and training has traditionally been very high in
Finland, with 70.1 %([60]) following
vocational courses in 2011 compared with an EU average of 50.4 %. The
employment rate of recent upper-secondary graduates([61]) stood at 75.9 % in 2013, which is above the EU average. In
this sector the number of participants in apprenticeships has traditionally
been relatively low in Finland; however, other forms of work-based learning are
in place as part of most vocational education and training programmes.([62]).
There is increased provision of
vocational education and training and apprenticeships in Finland. Finland has already increased the number of available places on
vocational-study courses in areas where demand is highest, and has created around
1 700 new apprenticeship placements. Progress could be beneficial as
apprenticeships can be an important skills development avenue for low-skilled
young people who may not be well suited to formal education, thereby
facilitating their integration into the labour market.
In the field of higher education, some
steps have been taken to improve performance of the system. Access to studies will be facilitated for those who have not yet
benefited from higher education, making it easier to gain a first study place.
There have also been performance incentives for students, as financial
assistance is now more closely linked with progress in studies, and for
universities, whose funding since 2013 has been more clearly linked to progress
and completion of studies by students. This model was extended to universities
of applied sciences in 2014. These changes could result in shortening the
relatively long duration of studies in Finland and they may also have a
positive impact on the duration of careers, with a consequent positive effect
on lifetime income and pensions.
Retail sector
The Finnish retail sector remains highly
concentrated and is dominated by two local retail groups. Finland’s regulation of the retail sector is one of the most
restrictive in the EU([63]). In the
light of this, the 2014 country-specific recommendations called for continued
efforts to enhance competition in the retail sector by amending the land use
and building act, as outlined in the programme on promoting healthy
competition. The remaining challenges include in particular the extent to which
competition is taken into account in the planning system, how municipalities
make decisions in awarding plots as well as the restrictions on large-scale
outlets in the land use and building act.
 Graph 3.3.1:   Restrictions on retail trade 
 Source: OECD Product market regulation database 
A multi-layered and hierarchical
planning process is required before new stores can be opened. Regional plans form the core of the system, defining planning
objectives to be reflected in the local plans. The establishment of large-scale
outlets outside the central areas needs to be foreseen in regional plans. The
main objectives of the land use and planning law are connected with an
improvement of the living environment. While this is a fully understandable and
valid aim, there is, in view of the current duopolistic market structure, a
strong case for easing market entry by lowering regulatory barriers, notably
those that restrict the establishment of large-scale grocery outlets. The
current regulatory system aims to protect in particular shops in city centres,
in order to maintain an integrated urban structure. But according to the
Competition and Consumer Authority, in a June 2013 report, the current approach
may be counterproductive due to higher price levels and rents in city centres.
The transparency of land allocation
could also be improved. Of municipal land allocation,
open tenders cover only 10 % of cases in the capital region and informal
allocation practices predominate. The two biggest retail groups, S Group and
Kesko, traditionally obtain the best places for retail establishments.
The establishment of large-retail
outlets is based on complex planning requirements that hamper market entry. According to the land use and planning act, large-scale retail
outlets are defined as outlets exceeding 2000 square metres. The law allows
higher thresholds to be defined in regional plans for regionally important
outlets([64]).
Nevertheless, given that the existing duopoly representing nearly 90 % of
the market already occupies the best central locations, the requirement to
locate outlets above a certain surface threshold only in urban areas makes the
market entry or market expansion very difficult for new operators.   Such
regulations have an impact on the limited productivity growth in the Finnish
retail sector. According to an OECD study, retail productivity would have been
35 % higher, meaning that GDP would have 6 % higher, if
productivity growth in Finnish retailing had kept up with that in Sweden since
1995([65]).
A proposal to modify the land use and
building act presented to the parliament in December 2014, did not address the
restrictions on large-scale outlets. However, this
was the core of the CSR on the retail sector. The current proposal of the
Government requires the municipalities to take into account business
environment and completion in spatial planning. However, as this requirement
remains at generic level and there are no detailed definitions in the law. The
Competition Authority found in its opinion on the draft bill that the way the
objective of competition had been integrated into the law was in practice
ineffective.
The way the policy of restricting
alcohol consumption, designed mainly from a public health perspective, is
implemented appears to inadvertently impact on competition. The state-owned alcohol monopoly Alko shops are typically located
next to the main retail groups. This has an impact on retail competition by
reinforcing market concentration through shopping synergies. Recently, the
Ministry of Social Affairs and Health has given additional guidance to Alko
regarding the location of liqueur stores to improve competition. The first
promising signs regarding the new store openings can already be seen. 
Competition policy
Finland might be departing from the
existing well-functioning policies as regards the fight against cartels. In May 2014, the Ministry of Employment and the Economy and the
Competition and Consumer Authority presented a report commissioned from the
Helsinki University which proposes to extend personal criminal responsibility
to cartels as a complement to the administrative fining system. The current
government is unlikely to take legislative action before the end of its term in
April 2015. Nevertheless, any changes to be introduced by the new government
would merit monitoring since criminal enforcement might pose a challenge for
Finland’s successful leniency system (system of exoneration from penalties for
cartel members that report their membership to a competition-enforcement
agency).
Energy market
An important gas infrastructure
development is on the way. In order to diversify
its energy supply, Finland is planning to undertake a major gas interconnector
project with Estonia (‘Balticconnector’), which is a new bidirectional pipeline
of around 150 km. It will have a major impact on security of supply and
diversification of gas sources in the Baltic region. The Balticconnector will
make gas from the regional liquefied natural gas (LNG) terminal project
available to the Baltic countries and Finland and it will also give the Finnish
gas market access to the Latvian underground gas storage in Inčukalns. The
LNG terminal will reduce the dependence of Estonia and Finland on imported
Russian gas and will thereby contribute in the medium-term to an improvement in
the security of supply in the Baltic region. The work is to start in 2015 and
be completed in 2019. In 2014, it obtained a grant of approximately
EUR 5.4 million under the Connecting Europe Facility for studies to
be carried out on its offshore and two onshore parts.
The long-pending issue of political
agreement regarding the location of the LNG terminal has been solved. The Prime Ministers agreed on the location of the Regional Baltic
LNG Terminal in Finland (provided that its implementation progresses according
to the agreed time schedule) and that the smaller LNG installation for
bunkering services and security-of-supply needs for Estonia will be constructed
in Estonia. This political agreement remains to be transposed into a legal
agreement between the concerned stakeholders. In addition to the Regional
Baltic LNG Terminal, several local LNG terminals intended for bunkering
services and for off-grid industry are being constructed in Finland.
Reforms in the municipal sector
The efficiency of public services has
not kept up with productivity developments in the private sector. Taking into account the challenges presented by ageing as well as
fiscal pressures, public administration should be as efficient as possible.
While the level of services is very high, the associated costs are also high
and some areas for additional efficiency could be found. 
Finnish municipalities are relatively
small, but carry out quite extensive tasks compared with other European
countries. The small size of municipalities raises
questions regarding the effectiveness of expenditure on administration, but
more importantly, it is not clear whether the small municipalities are able to
solve the problems in areas such as transport, education and health services in
the most effective manner. Taking this into account, Finland received a
country-specific recommendation to ensure effective implementation of ongoing
administrative reforms concerning municipal structures and social and
healthcare services. 
Social and healthcare reform is
generally supported by all political parties. The
government has introduced draft legislation which foresaw revising the existing
local government structure, social welfare and healthcare service structures
and financing and re-evaluating the statutory duties of local authorities. The
objective of the reform of the social welfare and healthcare service structure
is to fully integrate all social welfare and healthcare services in order to
create seamless service chains. The reform involves constitutional issues, as
there are provisions for municipal independence as well as for citizens’ rights
to receive social and healthcare services without regard to their place of
residence. On 19 February 2015, the Constitutional Committee of the parliament
found that the proposal violates the provisions of the constitution and needs
to be amended. The magnitude of the changes to be made and the compatibility of
the amended proposal with the initial objectives of the reform remain to be
seen. 
Access to good quality health and social
services for all income groups and geographical areas has been an important
challenge in Finland over the last two decades.
Although the objective of health policy since the 1980s has been to narrow
health gaps, people in the lower income groups have drastically poorer health
and shorter lives. A 35 years old blue-collar worker is expected to reach the
age of 74, while a man in a management position has a life expectancy of 6
years more. For women, the difference in life expectancy by socioeconomic class
is three years. Healthy life expectancy is 11 years more for highly educated
men than for those with only basic levels of education, for women the gap is 8
years.([66]) 
The objective of the reform is not an
immediate cost-cutting. However, the reform offers
an opportunity to control future increases in costs. The reform also appears to
be a pre-condition for achieving the aims of the government’s Structural Policy
Programme. Indeed, in the latest decision on the programme on 28 August 2014,
it was found that the government currently does not possess the means to achieve
the reduction of municipal costs in the healthcare and long-term care areas.
Establishing a system to control cost increases was deemed necessary and,
apparently, the social and healthcare services reform is working in this
direction. In addition, European legislation regarding patient rights to
cross-border healthcare needs to be taken into account.
The reform of municipal structures is
proceeding less speedily. The municipalities are
conducting studies about the benefits of mergers. Currently, 40 studies
involving 158 municipalities are being carried out. The studies will provide
the basis for reasonable decision making regarding the mergers. At the
beginning of 2015, there were three mergers involving six municipalities. The
deadline for completion of the studies has been extended to 29 April 2016.
Municipalities that merge during 2017 are eligible for special grants. 
On 28 August 2014 the government also
decided to establish the Metropolitan Authority to resolve land use, housing
and transport problems in the greater Helsinki area. Stakeholder consultation ended on 4 February 2015 and resulted in
82 opinions, which will be used to develop the plan further. The initial
proposal foresaw that the Metropolitan Authority will be launched to coincide
with the 2017 local government elections. The Metropolitan Authority’s duties
will include the preparation of a metropolitan plan and ensuring its
implementation (with plan programmes and other appropriate measures) and the
following regional public law duties: public transport planning and management
(Helsinki Regional Transport), environmental issues of the Helsinki Region
Environmental Services Authority and duties transferred from the Uusimaa
Regional Council. According to the government's proposal, the Metropolitan
Authority would not have its own right to raise taxes and the total tax rate of
the residents under Metropolitan Authority should not rise above its present
level. 
The reforms, when viewed as a whole,
have progressed markedly since the issuance of the country-specific
recommendations. The work has been related to the
analysis of needs, negotiations with stakeholders and the preparation of the
legislation. There has therefore been some progress in addressing the
country-specific recommendations.
Improving the business environment
To lower the administrative burden on
businesses, the government is seeking to simplify licensing requirements, in
particular sector-specific permits and those related to construction and
environment. While there are many strengths in the
general business environment,([67]) several
regulatory shortcomings — even though individually small — contribute to an
overall burden that could be reduced. An example is that some permit procedures
seem to be unnecessarily lengthy and unpredictable (the average total time for
acquiring environmental permits is 15.9 months). The Environmental Protection
Act is being revised with a view to expanding the use of electronic permits and
combining various environment-related ones. Regional authorities are encouraged
to cooperate in their supervisory and permit policies. To make e-government
services more widely available, the government is building a National Digital
Services Infrastructure, which will facilitate the introduction of a national
common digital identification solution, and the provision of better user
portals for citizens, businesses and government agencies. The Enterprise
Finland portal has been extended to include all business services and provide
advice on financial problems. It also provides information on the necessary
permits and notifications based on the profile of the firm.
Reforming R&D institutions and improving
the knowledge-transfer performance of universities
A reform of research institutes and
research funding was launched in 2013, aiming to improve the efficiency of the
system and to strengthen multidisciplinary and high-level research of
significance for society. Research institutes are
being combined, by field of research, into larger entities and a Strategic
Research Council has been established. The new Council finances research aimed
at finding solutions to challenges facing Finnish society and promoting renewal
of the country’s economic base and competitiveness, the development of working
life and enhancement of the public sector. The funding model of universities
has been revised with the objective to take better account of the quality of
scientific production. Implementation of these reforms should allow Finland to
make progress in increasing competitiveness, although the impact of the actions
can only be measured in the longer term.
The Research and Innovation (R&I)
Council advocates to go further and faster in the reform of the R&I system. The Council’s R&I policy outlook for 2015-20 — published in
November 2014 — underlines that, in the difficult economic environment of
recent years, the Finnish economy has not been able to compensate the decline
in the electronics and paper & pulp industries. It gives firm
recommendations for a better and sustainable contribution of R&D activities
to growth. Those recommendations include a stance on reform of the higher
education system.
The capacity of universities in turning
R&D into new innovative products, services and processes is a critical
issue. At a level of 1.01 % in 2013, Finland
ranked second in the EU for public R&D expenditures as a percentage of GDP.
Nevertheless, this significant level of public R&D activity is not
translated into equivalent results on the innovation side. As an illustration,
the percentage of expenditure on R&D financed by businesses in the
higher-education sector([68]) in 2012 was
5.0 % whereas the EU average is 6.4 %. Finland is developing smart-specialisation strategies based on regional strengths, and the
Ministry of Employment and the Economy has aligned European Regional
Development Fund investments to R&D with those strategies.
Overview table([69])
 Commitments || Summary assessment 
 2014 Country specific recommendations (CSRs) 
 CSR 1: Limit the emerging gap relative to the medium-term objective, ensure to return to it in 2015 and respect it thereafter as planned. Ensure that the debt criterion is fulfilled, while pursuing a growth-friendly fiscal policy. Implement rapidly the reforms set out in the structural policy programme and government spending limits and fiscal plan for 2015-2018 in order to reduce the fiscal sustainability gap and strengthen conditions for growth.   || Finland has made some progress in addressing CSR 1 of the Council recommendation. (This overall assessment of CSR 1 excludes an assessment of compliance with the Stability and Growth Pact.) ·       There is some progress regarding the implementation of the structural policy programme. The government is preparing the legislative acts needed for implementation of the structural policy programme. Some of the obligations of municipalities have been reduced, and the government has put forward plans to steer municipal finances through the general government fiscal plan. 
 CSR 2: Ensure effective implementation of the ongoing administrative reforms concerning municipal structure and social and healthcare services, in order to increase the cost-effectiveness in the provision of public services.   || Finland has made some progress in addressing CSR 2 of the Council recommendation. ·       There is some progress regarding the implementation of the administrative reforms. Regarding social and healthcare reform, a draft fundamental legislative proposal introduced by the government has been deemed incompatible with the constitution and needs to be revised. Regarding reform of municipal structures, the process is proceeding with some delays. Municipalities are carrying out their merger reviews. However, the government has decided to create a metropolitan authority in Helsinki region. 
 CSR 3: Improve the use of the full labour force potential in the labour market, including by improving the employment rate and the employability of older workers, and increasing the effective retirement age, by reducing early exit pathways and aligning the retirement age or pension benefits to changes in life expectancy. Improve the labour-market prospects of young people and the long-term unemployed, with a particular focus on vocational education and targeted activation measures.   || Finland has made some progress in addressing CSR 3 of the Council recommendation. ·       There is some progress in improving the use of full labour force potential. The Finnish wage subsidy system has been reformed with effect from the beginning of 2015, with a particular focus on the elderly and a clarified system for all potential recipients. Wage subsidies for the over-60s who have been unemployed for over 12 months will be introduced on a permanent basis. ·       There is some progress in improving the labour market prospects of the young people and the long-term unemployed. The Youth Guarantee has been introduced and implemented. It has contributed to limiting youth unemployment, with 67.8% of guarantee beneficiaries starting a job, a traineeship, apprenticeship or further education within four months of registering with the Finnish public employment service (after six months this increased to 89.6% of guarantee beneficiaries). However, taking better into account young people not in education, employment or training and targeting specific subgroups could increase its impact. Regarding the long-term unemployed, a new law has been adopted regarding a multi-professional joint service. The public employment service would work together with the municipal authorities and the social security institution to ensure tailor-made approach and a more intensive follow-up of the long-term unemployed. ·       There is some progress in increasing the effective retirement age. The social partners in Finland reached an agreement in September 2014 about a pension reform that will take effect in 2017. The agreement will be legislated once the details have been successfully established. The pension age will be raised gradually for those born in 1955, or later, until the lowest pension age is 65 (now 63). The pension age will be linked to life expectancy from 2027 so that the relation of time in work and on pension remains at the level of 2025. 
 CSR 4: Continue efforts to enhance competition in product and service markets, especially in the retail sector, by implementing the programme on promoting healthy competition, including amendments of the land use and building act to make it more supportive to healthy competition.     || Finland has made limited progress in addressing CSR 4 of the Council recommendation. ·       There has been limited progress in addressing competition in product and service markets. Although steps have been taken to improve competition in the retail sector, issues remain in particular with regard to large commercial establishments, due to planning law restrictions and market conditions. The healthy competition programme is not yet fully implemented. A new proposal for modification of the Land Use and Building Act presented to the Parliament in December 2014 incorporated competition as an objective, but the restrictions regarding large-scale outlets have not been addressed and remain problematic. 
 CSR 5: Continue to boost Finland’s capacity to deliver innovative products, services and high-growth companies in a rapidly changing environment, and continue the diversification of industry, in particular by improving the business environment to strengthen investment in Finland and further facilitating smaller firms’ entry into export markets. Step up the development of cross-border gas connection to Estonia.     || Finland has made some progress in addressing CSR 5 of the Council recommendation. ·       There has been some progress in boosting the capacity to deliver innovative products. The government is implementing a comprehensive reform of research institutes and research funding. Moreover, the government is reforming the funding model of both universities and polytechnics with specific attention to the utilisation of research. Policy programmes for clean technology, biotechnology and digitalisation are promising but are relatively small. Finland has allocated a significant share of European Regional Development Fund investments over 2014-20 to promote research and development and enterprise growth. ·       There has been some progress in the development of cross-border gas connection to Estonia. The parties have agreed on the ‘Roadmap on the development of the ‘Balticconnector’. The Prime Ministers concluded the ‘Communiqué Common approach for developing regional gas infrastructure in Estonia and Finland’ which covers the development of the Balticconnector and the Regional Baltic LNG Terminal. The Prime Ministers agreed that construction of the Balticconnector is to be completed by 2019, if technically feasible, and if a grant from the Union’s Connecting Europe Facility (CEF) programme is provided. ·       There has been limited progress in the diversification of industry. The government’s structural policy programme has included steps to make support systems for businesses simpler and more efficient. Considerable efforts have been made in adding financing for start-ups, and in promoting their internationalisation. Despite these steps, investment in Finland has remained low, export difficulties have continued and employment has been reduced. 
 Europe 2020 (national targets and progress) 
 Employment rate target set in the 2013 National Reform Programme: 78%   || 73.3%. The ambitious target on the employment rate will be difficult to meet, especially considering the continuous negative trend. 
 R&D target set in the 2013 NRP: 4% of GDP || In 2013, R&D intensity in Finland was 3.32%, the highest in Europe. Finland is not on track though to reach its R&D intensity target for 2020, due to a decrease in business R&D intensity (from 2.63% of GDP in 2009 to 2.29% in 2013). Business R&D expenditure has been on a declining trend since 2011 (10% under the peak level of 2008) and public R&D expenditure, which was continuously rising since 2000, have decreased for the first time in 2013. 
 Greenhouse gas emissions, base year 1990:   -National Greenhouse gas (GHG) emissions target: -16% in 2020 compared to 2005 (in non-ETS (Emissions Trading Scheme) sectors)   || Change in non-ETS greenhouse gas emissions between 2005 and 2013: -13%. According to the latest national projections submitted to the Commission and taking into account existing measures, it is expected that the target will be missed: -12 % in 2020 as compared with 2005 (i.e. a projected shortfall of 4 percentage points). To address this issue, the Government submitted to parliament in October 2014 a ‘Climate and Energy Roadmap 2050’ and is now preparing a ‘Climate Act’. The Roadmap sets the targets for Finland‘s progress towards becoming a carbon neutral society. The Climate Act, which is expected to be ready in 2015, will outline the framework for steering non-ETS emissions towards a reduction. 
 Renewable energy target set in the 2013 NRP: 38%   Share of renewable energy in all modes of transport: 20% || The share of renewable energy in gross final energy consumption was 37.1% in 2013, i.e. 98% of the overall 2020 target([70]). On renewable energy in general, Finland is well on track, and even slightly above in attaining its renewable energy target for 2020. In transport, the share of renewable energy in fuel consumption was 0.4% in 2012([71]). Finland needs to take appropriate measures for achieving the 2020 renewable energy target in transports. 
 Energy efficiency:   Finland has set an indicative national energy efficiency target of 310 TWh, which implies reaching a 2020 level of 35.9 Mtoe primary consumption and 26.7 Mtoe final energy consumption. || Finland’s 2020 energy efficiency target is 35.9 Mtoe expressed in primary energy consumption (26.7 Mtoe expressed in final energy consumption). Even if Finland’s current primary energy consumption (32.8 Mtoe in 2013) is below its 2020 target, the margin is small and additional efforts regarding energy efficiency are needed to keep primary energy consumption at this level or to minimise its increase if GDP increases again during the next six-year period. 
 Early school-leaving target: 8%   || Finland is performing better than the EU average in tackling early school leaving (with a rate of 9.3 % of early school leavers compared with an EU average of 12.0 % in 2013). However, its rate has remained fairly stable over the last decade, while the EU average has improved. The early school leaving rate tends to be significantly higher among migrants (14.9 % in 2012) and boys. 
 Tertiary education target: 42% || Finland’s tertiary educational attainment rate was 45.1 % compared with an EU average of 36.9 % in 2013, when measured according to the EU definition of the indicator. The rate of tertiary educational attainment among people born outside Finland remains lower than among those born in the country, at 33 % compared with 47 % in 2012 (measured according to the EU definition). The drop-out rate from higher education was 24.2 % in 2011 in Finland, compared with an OECD average of 31.6 % 
 Target on the reduction of population at risk of poverty or social exclusion in number of persons: 770 000 || 854 000. While the trend of reducing population at risk of poverty or social exclusion has been positive, it will be challenging to meet the target by 2020. 
 Table AB.1:     Macroeconomic indicators 
 Notes:                                                                                                                                                                                                          1 The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. 2 The indicator of domestic demand includes stocks.                                                                                                                         3 Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74. Source: European Commission 2015 winter forecast; Commission calculations                                                                   
 Table AB.2:     Financial market indicators 
 Notes:                                                                                                                                  1) Latest data November 2014.                                                                                                                            2) Latest data Q3 2014.                                                                                                                                             3) Latest data September 2014.                                                                                                                           4) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included.                                      * Measured in basis points.            Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators).                                                                                                                          
  
 Table AB.3:     Taxation indicators 
 1. Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), Taxation trends in the European Union, for a more detailed explanation.  2. This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital. 3. VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), Tax Reforms in EU Member States, and OECD (2014), Consumption tax trends. Source: European Commission 
  
 Table AB.4:     Labour market and social indicators 
 1 Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. 2 Long-term unemployed are persons who have been unemployed for at least 12 months. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.  Source:  European Commission (EU Labour Force Survey and European National Accounts) 
 Table AB.5:     Labour market and social indicators (continued) 
 1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 2 At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income. 3 Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone. 4 People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes) 6 2014 data refer to the average of the first three quarters. Source:  For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 
 Table AB.6:          Product market performance and policy indicators 
 1Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed. 2 Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting. 3 The methodologies, including the assumptions, for this indicator are presented in detail here:  HYPERLINK "http://www.doingbusiness.org/methodology" . 4 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here:  HYPERLINK "http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm" 5 Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators) 
  
 Table AB.7:     Green growth 
 Country-specific notes:  2013 is not included in the table due to lack of data.                  General explanation of the table items:                                                                                                                                                                                All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)    Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)    Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)     Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                           Waste intensity: waste (in kg) divided by GDP (in EUR)                                                                                                                      Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP                                                      Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)                                                                                                                                                                             Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR) Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDPElectricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.  Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste                                                   Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency                                                                   Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)                                                                                                   Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector                                                                                                                                                                                  Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels                                                                                                                                                                                      Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin                                                                                                                                                                              Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels                                                                                                                                                                                        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalent * European Commission and European Environment Agency                                ** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2. *** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2.                       Source: European Commission unless indicated otherwise, European Commission calculation 
([1])  Reference is made to projections by the
European Commission, the IMF, the OECD and the Finnish central bank.
([2])  Finland boasts the highest government
expenditure ratio (59 %) and government revenue ratio (56 %) in the
EU.
([3])  The trend is calculated as the 12-month
moving sum.
([4])  Section 2.2. contains a more detailed
analysis of the trade developments.
([5])  A high index signals a different export
structure vis-à-vis the world.
([6])  For a detailed analyses see: Kaitila, Ville & Virkola, Tuomo
(2014). ‘Openness, Specialisation
and Vulnerability of the Nordic Countries’, ETLA Reports No 21.
([7])  See e.g. Emlinger,
C. & Berthou, A. (2009). "High quality imports suffer more during
recessions". VOX, CEPR's Policy Portal.
([8])  Secondary production includes mining
and quarrying (which have accounted for around 1 % of secondary
production over the past 10 years), manufacturing (68 %), electricity,
water supply and waste management (10 %) and construction (21 %).
([9])  Kauhanen A. and M. Maliranta (2014):
Industry- and firm-level mechanisms of competitiveness in Valkonen T. and V. Vihriälä
(eds.) (2014) Nordic Model —challenged but capable of reform. TemaNord 2014:531
([10]) The developments of other sources of
costs are discussed in more detail in Macroeconomic Imbalances - Finland 2014,
European Economy, Occasional Papers 177, March 2014.
([11]) Conversely, manufacturing and the final
assembly represented only 2-5% of the global value chain.
([12]) Export component (domestic value added
embedded in foreign final demand) = total export * (1- import content of
export);
Import component (import for domestic
final demand) = import - (import content of export * total export).
([13]) These findings are
supported for instance by (i) Audrretsch, D.B. and M. Keilbach, 2003,
“Entrepreneurship capital and economic performance”, Centre for Economic Policy
Research Discussion Paper DP3678, London: CEPR. And (ii) Saxenian, A., 1994,
Regional Advantage, Cambridge, MA: Harvard University Press.
([14]) This general finding
also applies to Finland as documented by C. Criscuolo, P. N. Gal and C. Menon
(2014), “The Dynamics of Employment Growth: New Evidence from 18 Countries”,
OECD Science, Technology and Industry Policy Papers no. 14
([15]) See Pajarinen and
Rouvinen: Kilpailukyky à la IMD ja WEF, ETLA 2014 http://www.etla.fi/julkaisut/kilpailukyky-a-la-imd-ja-wef/ 
([16]) This is supported by Bottke, P.J. and
Coyne, C.J. (2009) Context Matters: Institutions and Entrepreneurship.
Foundations and Trends in Entrepreneurship, 5(3)
([17]) In line with the global pattern, the
Finnish economy is dominated by small businesses based on the number of firms
in the various size categories.
([18]) The DynEmp database is managed by the
OECD. For further details, see: C. Criscuolo, P. N. Gal and C. Menon (2014),
“The Dynamics of Employment Growth: New Evidence from 18 Countries”, OECD
Science, Technology and Industry Policy Papers no. 14
([19]) Sole proprietors are relegated from the
main DynEmp output data to ensure horizontal consistency among countries.
Consequently, the high share of solo proprietors in Finland cannot explain the
low share of young firms in small businesses.
([20]) This conclusion is suggested by the
fact that the average employment size of old, — i.e. at least 10-years old
businesses — is around the average of the observed countries while the average
number of people employed by  start-ups is high.
([21]) In seven SBA areas Finland is
performing above the EU average and is in line with the EU average in two areas
— state aid and public procurement, and environment. Finland trails its EU
peers only in the single market policy area.
([22]) Nascent entrepreneurs are actively
involved in setting up a business they will own or co-own and this business has
not paid salaries, wages or any other payments to the owners for more than
three months. Early-stage entrepreneurs consist of those who are either a
nascent entrepreneur or owner-manager of a new business, i.e. which has paid
compensation to the owner for not more than 42 months.
([23]) However, specifically in the technology
sector of the Nordic countries, including Finland, the start-up rate and the
private venture capital they receive is high compared with other regions, according
to various estimations. See: http://www.thenordicweb.com/
([24]) For a detailed analyses see Koellinger,
Ph.D. (2008), Why are some entrepreneurs more innovative than others?, Small
Business Economics 31, 21-37.
([25]) For a detailed analyses see Terjesen,
Siri and Jolanda Hessels (2009), Varieties of export-oriented entrepreneurship
in Asia, Asia Pacific Journal of Management 26 (3), 537-561.
([26]) For a detailed analyses see Wennekers,
A.R.M., van Stel, A. J., Carree, M.A., & Thurik, A.R. (2010). The relation
between entrepreneurship and economic development: is it U-shaped? Foundations
and Trends in Entrepreneurship, 6(3), 167-237.
([27]) Multiple answers have been allowed.
([28]) For a detailed analyses see Pajarinen,
M. &Rouvinen, P. (2013)."Nokia’s Labor Inflows and Outflows in
Finland: Observations from 1989 to 2010". ETLA Reports No 10.
([29]) Net of banks' borrowing from the
Eurosystem, which was significantly lower that their deposits.
([30]) This topic was analysed in the 2013
in-depth review for Finland.
([31]) Finnish FSA press release 10/2014 of 30
September 2014 
([32]) Finnish FSA press release 14/2014 of 3
December 2014
([33]) In loan statistics by Bank of Finland,
housing associations are all included in the non-financial corporate sector.
([34]) Annual surveys on saving, borrowing and
payment methods carried out by Federation of Finnish Financial services,
www.fkl.fi.
([35]) http://www.finanssivalvonta.fi/fi/Tiedotteet/Lehdistotiedotteet/Documents/Otantatutkimus_asuntoluotoista_2012.pdf

([36]) House price developments in Finland are
discussed in more detail in Marrez H. and Pontuch P., (2013), ‘Finland’s high
house prices and household debt: a source of concern?’, ECFIN Country Focus,
Volume 10 issue 6, European Commission
([37]) OECD Economic
Outlook no 93, Annex Table 33.
([38]) Law 869/2012 Laki talous- ja rahaliiton vakaudesta,
yhteensovittamisesta sekä ohjauksesta ja hallinnasta tehdyn sopimuksen
lainsäädännön alaan kuuluvien määräysten voimaansaattamisesta ja sopimuksen
soveltamisesta sekä julkisen talouden monivuotisia kehyksiä koskevista
vaatimuksista.
([39]) Ministry of
Finance publications, 2/2015 Kohti julkisen talouden kokonaisohjausta – julkisen
talouden suunnitelman ja kuntatalousohjelman kehittäminen
([40]) Ministry of Employment Unemployment
Bulletin, december 2014 http://www.temtyollisyyskatsaus.fi/Graph/Tkat/Pdf/Tkat_en.pdf
([41]) http://www.stat.fi/til/vaenn/2012/vaenn_2012_2012-09-28_tau_001_en.html

([42]) http://www.etk.fi/fi/gateway/PTARGS_0_2712_459_440_3034_43/http %3B/content.etk.fi %3B7087/publishedcontent/publish/etkfi/fi/julkaisut/katsaukset_ja_selvitykset/katsaukset/tyoelakeindikaattorit_2014_7.pdf,
p. 21
([43]) http://www.stm.fi/en/ministry/strategies_and_programmes/people_with_partial_work_ability 
([44]) Osatyökykyisten työllistymistä edistävien
säädösmuutostarpeiden ja palvelujen arviointi, Sosiaali- ja terveysministeriön
raportteja ja muistioita 2013:37
([45]) ELÄKETURVAKESKUKSEN
RAPORTTEJA 08/14, Työolot ja eläkeajatukset 2013, http://www.etk.fi/fi/gateway/PTARGS_0_2712_459_440_3034_43/http %3B/content.etk.fi %3B7087/publishedcontent/publish/etkfi/fi/julkaisut/tutkimusjulkaisut/raportit/tyoolot_ja_elakeajatukset_2013_7.pdf 
([46]) J. Lassila, N.
Määttänen, T. Valkonen; Työeläkeuudistus 2017: vaikutukset työuriin,
tulonjakoon ja julkisen talouden kestävyyteen
([47]) Source: Eurostat
data from 2013
([48]) Työkyvyttömyyseläke
ja ansiotyö, Eläketurvakeskuksen raportteja http://www.etk.fi/fi/gateway/PTARGS_0_2139_459_440_3034_43/http %3B/content.etk.fi %3B7087/publishedcontent/publish/etkfi/fi/julkaisut/tutkimusjulkaisut/raportit/tyokyvyttomyyselake_ja_ansiotyo_7.pdf, pp.42-43
([49]) Onko
työmarkkinoilla tilaa kaikille? Työ- ja elinkeinoministeriön julkaisuja, p.
127. http://www.tem.fi/files/40365/TEMjul_22_2014_web_16062014.pdf

([50]) Ministry of Finance Economic Bulletin 2/2013.
([51]) Employment and Social Developments in Europe 2013.
([52]) In 2011 the government
set a target to raise the activation rate of the unemployed to over 30 %. In January 2014, it was 26.4 %.
([53]) Talousnäkymät ja
palkanmuodostus, Valtioneuvoston kanslia http://www.vm.fi/vm/fi/04_julkaisut_ja_asiakirjat/01_julkaisut/02_taloudelliset_katsaukset/20150109Tuloja/TUKUSETO_13-01-2015.pdf 
([54]) Ministry of Employment Unemployment
Bulletin, december 2014
http://www.temtyollisyyskatsaus.fi/Graph/Tkat/Pdf/Tkat_en.pdf
([55]) Ministry of
Finance, 2013: Asuntomarkkinoiden rooli työvoiman alueellisessa liikkuvuudessa https://www.vm.fi/vm/fi/04_julkaisut_ja_asiakirjat/01_julkaisut/08_muut_julkaisut/20130402Asunto/1_Asuntomarkkinoiden_rooli_tyoevoiman_alueellisessa_liikkuvuudessa.pdf 
([56]) European Commission (2013),
"Report on Health Inequalities in the European Union", Commission
Staff Working Document SWD (2013) 328 final.
([57]) The EU average in comparison for 2012
is 5.3 %. 
([58]) See the 2014 Draft Budgetary Plan for
Finland   http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/fi_2013-10-15_dbp_en.pdf.
([59]) See the additional country charts for
the Europe 2020 headline target and the Education and Training 2020 benchmark
at http://ec.europa.eu/education/monitor.
([60]) This number includes upper secondary
(ISCED 3) and post-secondary non-tertiary VET (ISCED 4. 
([61]) People aged 20-34 having left education
between one and three years before the reference year. //ec.europa.eu/economy_finance/economic_governance/sgp/pdf/dbp/fi_2013-10-15_dbp_en.pdf.
([62]) Apprenticeship supply in the Member
States of the European Union’, Final report, European Commission, 2012. More on
http://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=6633&visible=
([63]) See OECD product market regulation
indicators for the retail sector (2013)
([64]) For example, the current threshold for
convenience stores in the regional plan for the Uusimaa region is 5000 square
metres.
([65]) OECD Economic
Survey, Finland 2012, p.25
([66]) http://www.thl.fi/fi/web/hyvinvointi-ja-terveyserot/eriarvoisuus/terveys/pitkaaikaissairastavuus
([67]) World Bank: Doing Business 2015.
([68]) This is an indicator of collaboration
between universities and firms and hence of knowledge transfer. 
([69]) The following categories are used to
assess progress in implementing the 2014 CSRs:
no progress: The Member State (MS) has neither announced nor adopted measures
to address the CSR. This category also applies if the MS has commissioned a
study group to evaluate possible measures.
Limited progress: The MS has announced some measures to address the CSR, but these
measures appear insufficient and/or their adoption/implementation is at risk.
Some progress: The MS has announced or adopted measures to address the CSR. These
are promising, but not all of them have been implemented and it is not certain
that all will be.
Substantial progress: The MS has adopted measures, most of which have been implemented.
They go a long way towards addressing the CSR.
Fully addressed: The MS has adopted and implemented measures that address the CSR
appropriately.
([70]) Eurobserv’ER Estimation of the renewable energy share in gross
final energy consumption for the year 2013
([71]) Eurostat